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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
(Mark One)

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 (FEE REQUIRED)

For the fiscal period ended December 31, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

Commission File Number 0-19509

EQUUS II INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)


DELAWARE 76-0345915
---------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

2929 Allen Parkway, Suite 2500 77019
Houston, Texas -------------------
---------------------------------- (Zip Code)

Registrant's telephone number, including area code: (713) 529-0900

Securities registered pursuant to Section 12(b) of the Act:

Title of each class Name of each exchange
on which registered

Common Stock New York Stock Exchange
------------------- -----------------------

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in the definitive proxy or information statement
incorporated by reference in Part III of this 10-K. [ ]

Approximate aggregate market value of common stock held by non-affiliates of the
registrant: $53,656,566, computed on the basis of $10.1875 per share, closing
price of the common stock on the New York Stock Exchange on February 29, 2000.
For purposes of calculating this amount only, all directors and executive
officers of the registrant have been treated as affiliates. There were 6,744,700
shares of the registrant's common stock, $.001 par value, outstanding as of
February 29, 2000. The net asset value of a share at December 31, 1999 was
$16.61.

Documents incorporated by reference: Proxy Statement for 2000 Annual Meeting of
Stockholders is incorporated by reference in Part III.

TABLE OF CONTENTS

Page
----
PART I

Item 1. Business........................................................ 1
Item 2. Properties....................................................... 18
Item 3. Legal Proceedings................................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.............. 18

PART II

Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................ 18
Item 6. Selected Financial Data.......................................... 20
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 21
Item 7A. Quantitative and Qualitative Disclosure About Market Risk........ 30
Item 8. Financial Statements and Supplementary Data...................... 32
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 55

PART III

Item 10. Directors and Executive Officers of the Registrant............... 55
Item 11. Executive Compensation........................................... 55
Item 12. Security Ownership of Certain Beneficial Owners and Management .. 55
Item 13. Certain Relationships and Related Transactions................... 55
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.. 55

ii

ITEM 1. BUSINESS.

Equus II Incorporated (the "Fund") is a Delaware corporation that seeks to
achieve capital appreciation principally by making investments in equity and
equity-oriented securities issued by privately-owned companies in transactions
negotiated directly with such companies ("Portfolio Companies"). The Fund seeks
to invest primarily in companies that intend to acquire other businesses,
including through leveraged buyouts. The Fund may also invest in
recapitalizations of existing businesses or special situations from time to
time. The Fund's investments in Portfolio Companies consist principally of
equity securities such as common and preferred stock, but also include other
equity-oriented securities such as debt convertible into common or preferred
stock or debt combined with warrants, options or other rights to acquire common
or preferred stock. Current income is not a significant factor in the selection
of investments. The Fund has elected to be treated as a business development
company under the Investment Company Act of 1940 (the "Investment Company Act").

The Fund has eight directors. Five of such directors are disinterested
individuals (the "Independent Directors") as defined by the Investment Company
Act. The directors are responsible for providing overall guidance and
supervision of the Fund, approving the valuation of the Fund's investments and
performing various duties imposed on directors of a business development company
by the Investment Company Act. Among other things, the Independent Directors
supervise the management arrangements for the Fund, the custody arrangements
with respect to portfolio securities, the selection of independent public
accountants, fidelity bonding and any transactions with affiliates.

The Fund has engaged Equus Capital Management Corporation, a Delaware
corporation (the "Management Company"), to provide certain investment management
and administrative services to the Fund. Subject to the supervision of the
directors, the Management Company performs, or arranges for third parties to
perform, the management, administrative, certain investment advisory and other
services necessary for the operation of the Fund. The Management Company
identifies, evaluates, structures, monitors and disposes of the Fund's
investments. The Management Company also manages the Fund's cash and short-term,
interest-bearing investments and provides the Fund, at the Management Company's
expense, with the office space, facilities, equipment and personnel (whose
salaries and benefits are paid by the Management Company) necessary to enable
the Fund to conduct its business.

The Management Company, its officers and directors and the officers of the
Fund are collectively referred to herein as "Management". The Fund's principal
office is located at 2929 Allen Parkway, Suite 2500, Houston, Texas 77019-2120,
and the telephone number is (713) 529-0900.

INVESTMENT PRACTICES

Substantially all of the net assets of the Fund are invested or committed
to be invested in securities of Portfolio Companies. Substantially all amounts
not invested in securities of Portfolio Companies are invested in short-term,
highly liquid investments consisting of interest-bearing bank accounts,
certificates of deposit or securities issued or guaranteed as to interest and
principal by the United States or by a person or entity controlled or supervised
by and acting as an instrumentality of the government of the United States that
have maturities of less than one year from the date of investment or other
short-term, highly liquid investments providing, in the opinion of the
Management Company, appropriate safety of principal.

The Fund's investments in portfolio securities are usually structured in
private transactions negotiated directly with the owner or issuer of the
securities acquired.

1

The Fund is concentrating its investment efforts on companies of a type
and size that, in management's view, provide opportunities for significant
capital appreciation, relative ease of acquisition and disposition, reduced
competition for investments and prudent diversification of risk.

The enterprise value of a Portfolio Company typically ranges from
$15,000,000 to $75,000,000, at the time of the Fund's initial investment. The
Fund's initial investment in a Portfolio Company typically ranges from
$2,000,000 to $8,000,000, depending on the investment. The balance of the
purchase price of a Portfolio Company is supplied by debt financing and other
equity investors, if necessary.

The Fund is attempting to reduce certain of the risks inherent in private
equity-oriented investments by investing in a portfolio of companies involved in
different industries. The Fund has limited its initial investment (whether in
the form of equity or debt securities, commitments to purchase securities or
debt guaranties) in any Portfolio Company to no more than 15% of the Fund's net
assets. However, if a follow-on investment is available or required, as
discussed below, the Fund's investment in a particular Portfolio Company may
exceed these initial investment limitations. Also, investments in certain
Portfolio Companies may be in excess of the Fund's initial investment
limitations due to increases in the value of such investments.

The Fund may make investments as a sole investor, with other professional
investors or with other persons. The Fund ordinarily will not be the sole
investor in a Portfolio Company. Joint equity participants may include
management of the Portfolio Company, other business development companies, small
business investment companies, other institutional or individual investors or
venture capital groups. The investment position of the Fund and its
co-investors, if any, in Portfolio Companies will typically involve a
substantial, and may constitute a controlling, interest in such companies.

The Fund may borrow funds to make new or follow-on investments, to
maintain its pass through tax status, or to pay contingencies and expenses. See
"Borrowing" and "Loss of Conduit Tax Treatment" under "Factors that May Affect
Future Results, the Market Price of Common Stock, and the Accuracy of Forward
Looking Statements."

INVESTMENT CRITERIA

Prospective investments are evaluated by Management based upon criteria
that may be modified from time to time. The criteria currently being used by
Management in determining whether to make an investment in a prospective
Portfolio Company include:

1. The presence or availability of competent management;

2. The existence of a substantial market for the products or services
of the company characterized by favorable growth potential, or a
substantial market position in a stable industry;

3. The existence of a history of profitable operations or a reasonable
expectation that operations can be conducted at a level of
profitability acceptable in relation to the proposed investment; and

4. The willingness of the company to permit the Fund and its
co-investors, if any, to take a substantial position in the company
and have representation on its board of directors, so as to enable
the Fund to influence the selection of management and basic policies
of the company.

2

CO-INVESTMENTS

The Fund has coinvested in certain Portfolio Companies with Equus Capital
Partners, L.P., a Delaware limited partnership and an affiliate of the Fund
("ECP"). The Fund and Management obtained an order from the Securities and
Exchange Commission (the "SEC") exempting the Fund from certain prohibitions
contained in the Investment Company Act relating to coinvestments by the Fund
and ECP. Under the terms of the order, Portfolio Securities purchased by the
Fund and ECP were required to meet certain guidelines or be approved in advance
by the Independent Directors and were required to satisfy certain conditions
established by the SEC.

INVESTMENT OPERATIONS

The investment operations of the Fund consist principally of the following
basic activities:

IDENTIFYING INVESTMENTS. Investment opportunities are identified for the
Fund by the Management Company and its officers and directors. Investment
proposals may, however, come to the Fund from many other sources, and may
include unsolicited proposals from the public and referrals from banks, lawyers,
accountants and members of the financial community. Subject to the approval of
the Board of Directors, the Fund may pay such persons (including affiliates of
Management other than directors, officers and employees of the Management
Company) finder's fees to the extent permissible under applicable law and
consistent with industry practice.

EVALUATING INVESTMENT OPPORTUNITIES. Prior to committing funds to an
investment opportunity, due diligence is conducted to assess the prospects and
risks of the potential investment. See "Investment Criteria" above.

STRUCTURING INVESTMENTS. Portfolio Company investments typically are
negotiated directly with the prospective Portfolio Company or its affiliates.
The Management Company structures the terms of a proposed investment, including
the purchase price, the type of security to be purchased and the future
involvement of the Fund and affiliates in the Portfolio Company's business
(including representation on its board of directors). The Management Company
seeks to structure the terms of the investment so as to provide for the capital
needs of the Portfolio Company and at the same time maximize the Fund's
opportunities for capital appreciation in its investment.

PROVIDING MANAGEMENT ASSISTANCE AND MONITORING OF INVESTMENTS. Successful
private equity investments typically require active monitoring of, and
significant participation in, major business decisions of Portfolio Companies.
In most cases, officers of the Fund serve as members of the boards of directors
of Portfolio Companies. Such management assistance is required of a business
development company under the Investment Company Act and is intended to enable
the Fund to provide guidance and management assistance with respect to such
matters as capital structure, budgets, profit goals, diversification strategy,
financing requirements, management additions or replacements and development of
a public or private market for the securities of the Portfolio Company. In
connection with their service as directors of Portfolio Companies, officers and
directors of Management may receive and retain directors' fees or reimbursement
for expenses incurred, and may participate in incentive stock option plans for
non-employee directors, if any. When necessary, the Management Company, on
behalf of the Fund, may also assign staff professionals with financial or
management expertise to assist Portfolio Company management on specific
problems.

3

CURRENT PORTFOLIO COMPANIES

The following is a description of the Fund's investments in its 26
Portfolio Companies at December 31, 1999.

A. C. LIQUIDATING CORPORATION

A. C. Liquidating Corporation ("ACL"), Houston, Texas, has disposed of its
operating businesses and real estate. ACL intends to liquidate in 2000 and will
distribute its remaining cash, if any, to its shareholders as soon as possible.
At December 31, 1999, the Fund's investment in ACL consisted of $188,014 in 10%
secured promissory notes, which was recorded at no value. Nolan Lehmann,
President of the Fund, serves as a director of ACL.

ALLIED WASTE INDUSTRIES, INC. (NYSE: AW)

Allied Waste Industries, Inc. ("AW"), Scottsdale, Arizona, is a vertically
integrated solid waste management company providing non-hazardous waste
collection, transfer, recycling and disposal services to residential, municipal
and commercial customers. At December 31, 1999, the Fund's investment in AW,
valued at $7,561,125 with a cost of $3,121,565, consisted of 900,000 shares of
common stock valued at a discounted average of $8.40 per share. The December 31,
1999 closing price of AW's common stock on the New York Stock Exchange was
$8.813 per share. Due to restrictions on the Fund's ability to sell a portion of
the common stock, the aggregate value recorded by the Fund was $370,125 less
than the aggregate value based on the market price at December 31, 1999. The
Fund's investment in AW represents less than a 1% equity interest in AW. Mr.
Lehmann serves on AW's Board of Directors.

CHAMPION WINDOW, INC.

Champion Window, Inc. ("Champion"), Houston, Texas, manufactures and sells
aluminum windows for single and multi-family residential purposes, primarily in
Houston, San Antonio and Austin, Texas. At December 31, 1999, the Fund's
investment in Champion, valued at $9,100,000 with a cost of $6,900,000,
consisted of 1,400,000 shares of common stock, 20,000 shares of preferred stock
and a 12% subordinated promissory note in the amount of $3,500,000. The Fund's
investment in Champion represents a 32.4% fully-diluted equity interest. Mr.
Lehmann and Patrick M. Cahill, a Vice President of the Fund, serve as directors
of Champion.

CONTAINER ACQUISITION, INC.

Container Acquisition, Inc. ("Container"), Houston, Texas, is a logistics
and maintenance services company serving owners of international shipping
containers. At December 31, 1999, the Fund's investment in Container, valued at
$9,840,000 with a cost of $7,340,000, consisted of 1,370,000 shares of common
stock, 59,690 shares of preferred stock and a warrant, exercisable under certain
conditions, to buy 370,588 shares of common stock at $0.01 per share. The Fund's
investment in Container represents a 65% fully-diluted equity interest Mr.
Lehmann, and Randall B. Hale, a Vice President of the Fund, serve on Container's
Board of Directors.

CRC HOLDINGS, CORP.

CRC Holdings, Corp. ("CRC"), Houston, Texas, was formed to acquire CRC
Evans Pipeline International, Inc., which designs, manufactures, and services
specialized pipeline construction and

4

automatic welding equipment which it rents and sells worldwide. In July 1999,
the Fund sold its interest in CRC to LG&E Energy Corp ("LGE"). The Fund received
$12,128,572 in cash and 121,504 shares of LGE common stock valued at $2,039,748
on the date such shares were received. In addition, the Fund was repaid its
$959,700 promissory note due from CRC, and 115,860 shares of LGE common stock
are being held in escrow to support representations and warranties made by the
Fund in the sale agreement. The Fund is entitled to additional consideration of
up to $11.7 million pursuant to an earn-out agreement that is based on the
performance of CRC over its last two and the next three fiscal years. The
remaining earnout receivable and shares held in escrow at December 31, 1999,
with a cost of $3,754,199, is valued at $6,800,000.

THE DRILLTEC CORPORATION

The Drilltec Corporation ("Drilltec"), Houston, Texas, provides protection
and packaging of premium oil tubular goods, drill pipe and line pipe and
manufactures thread protectors for customers worldwide. At December 31, 1999,
the Fund's investment in Drilltec, which was recorded at $524,000 with an
original cost of $8,169,000, consisted of 1,400,000 shares of common stock,
62,450 shares of preferred stock, a warrant to purchase 10% of the common equity
for $100 and a prime + 9.75% promissory note in the amount of $524,000. The
Fund's investment in Drilltec represents a 70% fully-diluted equity interest.
The Fund has committed to invest up to an additional $476,000 under certain
circumstances. Gary L. Forbes, a Vice President of the Fund, and Mr. Cahill
serve on Drilltec's Board of Directors.

DRYPERS CORPORATION (NASDAQ: DYPR)

Drypers Corporation ("DYPR"), Houston, Texas, manufactures and distributes
disposable diapers and baby wipes sold under the trade name Drypers(R) and under
various store label brands. DYPR is believed to be the third leading branded
diaper manufacturer in the United States, and has manufacturing facilities in
Marion, Ohio; Vancouver, Washington; Buenos Aires, Argentina; Guadalajara,
Mexico; Sao Paulo, Brazil, and in Puerto Rico and Malaysia. The December 31,
1999 closing price of DYPR's common stock on the NASDAQ National Market was
$2.406 per share. At December 31, 1999, the Fund's investment in DYPR, valued at
$7,078,291 with a cost of $9,328,556, consisted of 3,677,906 shares of common
stock. The stock was valued at a discounted average of $1.92 per share due to
restrictions on the Fund's ability to sell such stock, which resulted in an
aggregate reduction in value from the market price on such date of $1,771,486.
The Fund's investment in DYPR represents an approximate 21% fully-diluted equity
interest. Mr. Lehmann and Mr. Forbes serve as directors of DYPR.

EQUICOM, INC. (FORMERLY TEXROCK RADIO, INC.)

Equicom, Inc. ("Equicom"), Austin, Texas, was formed to acquire radio
stations in small to medium-sized cities in Texas. At December 31, 1999, Equicom
owned and operated 26 radio stations. At December 31, 1999, the Fund's
investment in Equicom, valued at $3,990,754 with a cost of $8,708,114, consisted
of 452,000 shares of common stock, 657,611 shares of preferred stock and
$1,990,754 in a 10% promissory note. The Fund's investment in Equicom represents
a 50% fully-diluted equity interest at December 31, 1999. The Fund has committed
to invest up to an additional $147,766 in Equicom under certain circumstances.
Mr. Hale and Tracy H. Cohen, a Vice President of the Fund, serve on Equicom's
Board of Directors.

5

EQUIPMENT SUPPORT SERVICES, INC.

Equipment Support Services, Inc. ("ESS"), Houston, Texas, was formed to
buy various companies in the equipment rental business including Carruth-Doggett
Industries, Inc. and CDI Rental Services, Inc. in which the Fund had an
investment. At December 31, 1999, the Fund's investment in ESS, valued at its
original cost of $3,168,500, consisted of 35,000 shares of common stock, 35,000
shares of preferred stock and $1,138,000 in an 8% promissory note. The Fund's
investment in ESS represents a 3.5% fully diluted equity interest at December
31, 1999.

GCS RE, INC.

GCS RE, Inc. ("GCS"), Houston, Texas, was formed to be a general partner
of a real estate partnership, which owns a warehouse that is leased to a former
subsidiary of a previously owned portfolio company. At December 31, 1999, the
Fund's investment in GCS consisted of 1,000 shares of common stock that was
valued at $300,000, with a cost of $132,910. The Fund owns 100% of the stock of
GCS, and GCS owns 50% of the real estate partnership. Sam P. Douglass, Chairman
and CEO of the Fund, and Mr. Lehmann serve on the Board of Directors of GCS.

HOT & COOL HOLDINGS, INC.

Hot & Cool Holdings, Inc. ("Hot & Cool"), Laredo, Texas, is a manufacturer
and distributor of automotive radiators and other heat transfer products. At
December 31, 1999, the Fund's investment in Hot & Cool, valued at $5,275,000
with a cost of $6,361,631, consisted of $1,075,000 in a 9% increasing rate
subordinated promissory note, $2,200,000 in 10% subordinated notes, $1,500,000
in a 12% senior unsecured promissory note, 19,665 shares of Series A 8%
preferred stock, 6,000 shares of Series B 8% preferred stock, 5000 shares of
Series C preferred stock, and warrants to buy up to 16,316, 14,942, and 10,000
shares of common stock for $26, $0.01 and $0.01 per share, respectively. The
Fund has committed to invest up to an additional $500,000 in Hot & Cool under
certain circumstances. The Fund's investment represents an approximate 25.8%
fully-diluted equity interest in Hot & Cool. Mr. Lehmann serves on Hot & Cool's
Board of Directors.

LG&E ENERGY CORP. (NYSE: LGE)

LG&E Energy Corp. ("LGE"), Louisville, Kentucky, is a regulated electric
and gas public utility engaged in the generation, transmission, distribution and
sale of natural gas in Louisville and adjacent areas of Kentucky. The December
31, 1999 closing price of LGE's common stock on the New York Stock Exchange was
$17.438 per share. At December 31, 1999, the Fund's investment in LGE, valued at
$1,800,917 with a cost of $1,719,838, consisted of 121,504 shares of common
stock. The common stock of LGE was valued by the Fund at a discounted average of
$14.82 per share at December 31, 1999, due to restrictions on the Fund's ability
to sell such stock, which resulted in an aggregate reduction in value from the
market price on such date of $317,809. The Fund's investment in LGE represents
less than an 1% equity interest in LGE.

NCI BUILDING SYSTEMS, INC. (NYSE: NCS)

NCI Building Systems, Inc. ("NCS"), Houston, Texas, manufactures and
markets metal building systems, components and roll up doors for non-residential
users from operating facilities located throughout the U.S. and Mexico. The
December 31, 1999 closing price of NCS's common stock on the New York Stock
Exchange was $18.50 per share. At December 31, 1999, the Fund's investment in
NCS consisted of 200,000 shares of common stock valued at $3,700,000 with a cost
of $159,784, which

6

represents an approximate 1% fully-diluted equity interest in NCI. Mr. Forbes
serves as a director of NCS.

PARACELSUS HEALTHCARE CORPORATION (NYSE: PLS)

Paracelsus Healthcare Corporation ("PLS"), Houston, Texas, owns or
operates, directly or through hospital partnerships, ten acute-care hospitals in
six states. The December 31, 1999 closing price of PLS's common stock on the New
York Stock Exchange was $0.438 per share. At December 31, 1999, the Fund's
investment in PLS, valued at $788,372 with a cost of $5,278,748, consisted of
2,018,213 shares of common stock. The common stock of PLS was valued by the Fund
at a discounted average of $0.39 per share at December 31, 1999, due to
restrictions on the Fund's ability to sell such stock, which resulted in an
aggregate reduction in value from the market price on such date of $94,597. The
Fund's investment in PLS represents an approximate 3% fully-diluted equity
interest in PLS. Mr. Lehmann serves on PLS' Board of Directors.

PETROCON ENGINEERING, INC.

Petrocon Engineering, Inc. ("Petrocon"), Houston, Texas, is an
international engineering, systems and construction management firm, servicing
industrial customers with a primary focus in the process industries - oil,
chemical, petrochemical and forest products. At December 31, 1999, the Fund's
investment, valued at its original cost of $7,323,323, consisted of 887,338
shares of common stock, $2,659,332 in an 8% Series B junior subordinated
promissory note, $4,663,356 in a 12% promissory note and a warrant to buy
1,552,571 shares of common stock for $0.01.

RAYTEL MEDICAL CORPORATION (NASDAQ: RTEL)

Raytel Medical Corporation ("RTEL"), San Mateo, California, is a leading
nationwide provider of alternate-site medical service to physicians, hospitals,
patients and managed care groups. The closing price of RTEL's common stock on
the NASDAQ National Market was $3.063 per share. At December 31, 1999, the
Fund's investment in RTEL, valued at $101,286 with a cost of $330,730, consisted
of 33,073 shares of common stock. The Fund's investment in RTEL represents less
than a 1% equity interest.

SOVEREIGN BUSINESS FORMS, INC.

Sovereign Business Forms, Inc. ("Sovereign"), Houston, Texas, is a
manufacturer of wholesale business forms in four states. At December 31, 1999,
the Fund's investment in Sovereign, valued at $4,396,343 with a cost of
$3,764,800, consisted of 14,648 shares of preferred stock, $2,300,000 in 15%
promissory notes and warrants to buy up to 551,894, 25,070 and 273,450 shares of
common stock at $1, $1.25 and $1 per share, respectively. The Fund's investment
represents a 31% fully-diluted equity interest in Sovereign. Mr. Forbes serves
on Sovereign's Board of Directors.

SPECTRUM MANAGEMENT, LLC

Spectrum Management, LLC ("Spectrum"), Dallas, Texas, was formed to
acquire a business which provides security devices to financial institutions. At
December 31, 1999, the Fund's investment in Spectrum, valued at its original
cost of $2,850,000, consisted of 285,000 units of Class A equity interests. The
Fund's investment in Spectrum represents a 79% fully-diluted equity interest in
Spectrum. Mr. Forbes and Mr. Hale serve on the Board of Directors of Spectrum.

7

STEPHEN L. LAFRANCE HOLDINGS, INC.

Stephen L. LaFrance Holdings, Inc. ("LaFrance"), Pine Bluff, Arkansas,
owns and operates 98 retail drug stores primarily in Arkansas, Mississippi and
Tennessee. At December 31, 1999, the Fund's investment in LaFrance, valued at
$5,498,452 with a cost of $2,498,452, consisted of 2,498,452 shares of preferred
stock and a warrant to buy 269 shares of common stock at $0.01 per share. The
Fund's investment in LaFrance represents an approximate 20% fully-diluted equity
interest. Mr. Forbes serves on the Board of Directors of LaFrance.

STRATEGIC HOLDINGS, INC. AND RELATED ENTITY

Strategic Holdings, Inc. ("SHI"), Houston, Texas, was formed to acquire
Strategic Materials, Inc., formerly known as Allwaste Recycling, Inc., the glass
recycling division of Allwaste, Inc. SHI receives and processes used glass,
which is then sold to the container, fiberglass and bead industries as a raw
material source. At December 31, 1999, the Fund's investment in SHI was valued
at $15,170,624 with an original cost of $13,659,013. The Fund's investment in
SHI consists of 3,089,751 shares of common stock, 3,822,157 shares of Series B
preferred stock, $6,750,000 in a 15% promissory note and warrants to buy
225,000, 100,000 and 2,219,237 shares of SHI at $0.4643, $1.50 and $0.01 per
share, respectively. Mr. Lehmann and Mr. Hale serve as directors of SHI.

SMIP, Inc. ("SMIP"), Houston, Texas, was formed to be the general partner
of a limited partnership which owns an 18% fully-diluted interest in SHI.
Management personnel of Strategic Materials, Inc. are the limited partners of
the partnership. At December 31, 1999, the Fund's investment in SMIP was valued
at $325,000, its original cost. The Fund's investment in SMIP consists of 1,000
shares of common stock and a $175,000, 15% promissory note. SMIP is wholly-owned
by the Fund. Mr. Lehmann and Mr. Hale serve as directors of SMIP.

The Fund's investments in SHI and SMIP represent an approximate 85%
fully-diluted equity interest in SHI.

SUMMIT/DPC PARTNERS, L. P.

Summit/DPC Partners, L. P. ("DPC"), Houston, Texas, was formed to invest
in Doane Pet Care Enterprises, Inc., which owns Doane Pet Care Company and Windy
Hill Pet Food Holdings, Inc., which combined are believed to be the largest
manufacturer of private label dry pet food in the United States. At December 31,
1999, the Fund's investment in DPC was valued at $5,500,000, with an original
cost of $2,600,000. The Fund's investment consists of an approximate 36.11%
limited partnership interest in DPC, which in turn owns an approximate 16%
fully-diluted interest in Doane Pet Care Enterprises, Inc.

TRAVIS INTERNATIONAL, INC.

Travis International, Inc. ("Travis"), Houston, Texas, distributes
specialty products for industrial and commercial use, including o-rings, gaskets
and sealants, builders' hardware and various other products used in the
construction industry. At December 31, 1999, the Fund's investment in Travis,
valued at $1,000,000 with a cost of $5,398, consisted of 98,761 shares of common
stock, which represents an approximate 6.8% fully-diluted equity interest in
Travis. Mr. Lehmann serves as a director of Travis.

8

TULSA INDUSTRIES, INC.

Tulsa Industries, Inc. ("Tulsa"), Broken Arrow, Oklahoma, manufactures
equipment for the oil and gas industry. At December 31, 1999, the Fund's
investment in Tulsa, was valued at $1,713,769 with an original cost of
$7,213,769. The Fund's investment consisted of 27,500 shares of common stock,
181,589 shares of Series A preferred stock, 1,058 shares of Series B preferred
stock and $655,769 in a junior participation promissory note representing an
approximate 26.3% fully-diluted equity interest. Mr. Forbes and Mr. Hale serve
on Tulsa's Board of Directors.

TURFGRASS AMERICA, INC.

Turfgrass America, Inc. ("Turfgrass"), Granbury, Texas, was formed for the
purpose of acquiring all the outstanding stock of C&D Turfgrass, Ltd., Crenshaw
& Doguet Turfgrass, Inc., Millberger Turf Farms, Inc., Millberger Turf Sales,
Inc., and 5-T Enterprises, Inc. (the parent of Thomas Bros. Grass, Ltd.). The
combination of these companies has created one of the largest warm season
turfgrass companies in the country. At December 31, 1999, the Fund's investment
in Turfgrass was valued at its cost of $4,075,000. The Fund's investment
consisted of 3,167,756 shares of common stock and $3,475,000 in a 12%
subordinated promissory note, representing an approximate 11% fully-diluted
equity interest in Turfgrass. Mr. Hale serves as a director of Turfgrass.

UNITED INDUSTRIAL SERVICES, INC.

United Industrial Services, Inc. ("UIS"), Houston, Texas, specializes in
field services for the petrochemical and power generation industries. At
December 31, 1999, the Fund's investment in UIS was recorded at its original
cost of $3,500,100 and consisted of 35,000 shares of preferred stock and
warrants to buy up to 63,637 shares of common stock at $0.01 through June 2008.
The Fund's investment in UIS represents an approximate 38% fully-diluted equity
interest. Mr. Forbes serves on UIS's Board of Directors.

VRPI SPIN OFF, INC. AND RELATED ENTITY

VRPI Spin Off, Inc. ("VRS"), Houston, Texas, owns the rights to receive
over 50% of all general partner distributions from a limited partnership that
has franchise rights to operate 12 BLOCKBUSTER(R) Entertainment Corporation
video cassette stores in the Pittsburgh, Pennsylvania area. At December 31,
1999, the Fund's investment in VRS, valued at its original cost of $3,972,349,
consisted of 100 shares of common stock, $1,050,000 in a 12% promissory note and
$2,672,349 in a 10% promissory note. VRS is wholly-owned by the Fund. Messrs.
Douglass, Lehmann and Dr. Williams, a director of the Fund, serve as directors
of VRS and Video Rental of Pennsylvania, Inc. ("VRP"), the managing general
partner of the limited partnership.

Equus Video Corporation ("Video"), Houston, Texas, owns an 80% limited
partnership interest in a partnership whose sole general partner is VRS. The
limited partnership operates 8 additional BLOCKBUSTER(R) Entertainment
Corporation video cassette stores in and around Pittsburgh. At December 31,
1999, the Fund's investment in 10,000 shares of common stock of Video was valued
at $20,000, with an original cost of $25,000. Mr. Douglass and Mr. Lehmann serve
as directors of Video.

TEMPORARY INVESTMENTS

Pending investment in Portfolio Companies, the Fund invests its available
funds in interest-bearing bank accounts, money market mutual funds, U.S.
Treasury securities and/or certificates of

9

deposit with maturities of less than one year (collectively, "Temporary
Investments"). Temporary Investments may also include commercial paper (rated or
unrated) and other short-term securities. Temporary Investments constituting
cash, cash items, securities issued or guaranteed by the U.S. Treasury or U.S.
Government agencies and high quality debt securities (commercial paper rated in
the two highest rating categories by Moody's Investor Services, Inc. or Standard
& Poor's Corporation, or if not rated, issued by a company having an outstanding
debt issue so rated with maturities of less than one year at the time of
investment) will qualify for determining whether the Fund has 70% of its total
assets invested in Managed Companies (as hereafter defined) or in qualified
Temporary Investments for purposes of the business development company
provisions of the Investment Company Act. See "Regulation" below.

FOLLOW-ON INVESTMENTS

Following its initial investment in a Portfolio Company, the Fund may be
requested to make follow-on investments in the company. Follow-on investments
may be made to take advantage of warrants or other preferential rights granted
to the Fund or otherwise to increase the Fund's position in a successful or
promising Portfolio Company. The Fund may also be called upon to provide
additional equity or loans needed by a Portfolio Company to fully implement its
business plans, to develop a new line of business or to recover from unexpected
business problems. The Fund may make follow-on investments in Portfolio
Companies from funds on hand or may borrow all or a portion of the funds
required to make such follow-on investments.

DISPOSITION OF INVESTMENTS

The method and timing of the disposition of the Fund's portfolio
investments is critical to the realization of capital appreciation and to the
minimization of any capital losses. The Fund expects to dispose of its portfolio
securities through a variety of transactions, including sales of portfolio
securities in underwritten public offerings, public sales of such securities and
negotiated private sales of such securities to the Portfolio Company itself or
to other investors. In addition, the Fund may distribute its portfolio
securities in-kind to its shareholders. In structuring investments, the Fund
endeavors to reach such agreements or understandings with a prospective
Portfolio Company as may be appropriate with respect to the method and timing of
the disposition of the Fund's investment and, if appropriate, seeks to obtain
registration rights at the expense of the Portfolio Company. The Fund bears the
costs of disposing of investments to the extent not paid by the Portfolio
Company.

OPERATING EXPENSES

The Management Company, at its expense, provides the Fund with office
space, facilities, equipment and personnel (whose salaries and benefits are paid
by the Management Company) necessary for the conduct of the Fund's business and
pays all costs related to proposed acquisitions of portfolio securities that are
not completed, unless such proposed acquisitions have been previously approved
by the Board of Directors of the Fund.

The Fund is responsible for paying certain expenses relating to its
operations, including: management fees to the Management Company; fees and
expenses of the Independent Directors; finder's fees; direct costs of proposed
investments in Portfolio Companies, whether or not completed, if such proposed
investments have been approved for acquisition by the Board of Directors of the
Fund; depositary fees of unaffiliated depositaries; fees of unaffiliated
transfer agents, registrars and disbursing agents; the administrative fee to the
Management Company; portfolio transaction expenses; interest; legal and
accounting expenses; costs of printing and mailing proxy materials and reports
to shareholders;

10

New York Stock Exchange fees; custodian fees; litigation costs; costs of
disposing of investments including brokerage fees and commissions; and other
extraordinary or nonrecurring expenses and other expenses properly payable by
the Fund.

VALUATION

On a quarterly basis, the Management Company performs a valuation of the
investments in portfolio securities of the Fund, subject to the approval of the
Board of Directors of the Fund. Valuations of portfolio securities are done in
accordance with generally accepted accounting principles and the financial
reporting policies of the SEC. The applicable methods prescribed by such
principles and policies are described below.

The fair value of investments for which no market exists (including most
investments made by the Fund) is determined on the basis of procedures
established in good faith by the Board of Directors of the Fund. As a general
principle, the current "fair value" of an investment being valued by the
directors would be the amount the Fund might reasonably expect to receive for it
upon its current sale. There is a range of values that are reasonable for such
investments at any particular time. Generally, cost is the primary factor used
to determine fair value until significant developments affecting the Portfolio
Company (such as results of operations or changes in general market conditions)
provide a basis for use of an appraisal valuation.

Appraisal valuations are based upon such factors as the Portfolio
Company's earnings, cash flow and net worth, the market prices for similar
securities of comparable companies and an assessment of the company's future
financial prospects. In the case of unsuccessful operations, the appraisal may
be based upon liquidation value. Appraisal valuations are necessarily
subjective.

The Fund may also use, when available, third-party transactions in a
Portfolio Company's securities as the basis of valuation (the "private market
method"). The private market method will be used only with respect to completed
transactions or firm offers made by sophisticated, independent investors.
Securities with legal, contractual or practical restrictions on transfer may be
valued at a discount from their value determined by the foregoing method to
reflect such restrictions.

Fund investments for which market quotations are readily available and
which are freely transferable are valued as follows: (i) securities traded on a
securities exchange or the NASDAQ National Market are valued at the closing
price on the date of valuation and (ii) securities traded in the
over-the-counter market are valued at the average of the closing bid and asked
prices on the date of valuation. For securities which are in a class of public
securities but are restricted from free trading (such as Rule 144 stock),
valuation is set by discounting the closing sales or bid price to reflect the
estimated effects of the illiquidity caused by such restrictions. The fair
values of debt securities, which are generally held to maturity, are determined
on the basis of the terms of the debt securities and the financial condition of
the issuer. Certificates of deposit purchased by the Fund generally will be
valued at their face value, plus interest accrued to the date of valuation.

The directors review the valuation policies on a quarterly basis to
determine their appropriateness and may also hire independent firms to review
the Management Company's methodology of valuation or to conduct an independent
valuation.

On a daily basis, the Fund adjusts its net asset value for the changes in
the value of its publicly held securities and material changes in the value of
its private securities and reports those amounts to

11

Lipper Analytical Services, Inc. Weekly and daily net asset values appear in
various publications, including BARRON'S and THE WALL STREET JOURNAL and on the
Fund's website at www.equuscap.com.

CUSTODIAN

The Fund acts as the custodian of its securities to the extent permitted
under the Investment Company Act and is subject to the restrictions imposed on
self-custodians by the Investment Company Act and the rules and regulations
thereunder. The Fund has entered into an agreement with Bank of America, N.A.
with respect to the safekeeping of such securities. The principal business
office of the custodian is 700 Louisiana Street, Suite 3200, Houston, Texas
77002.

TRANSFER AND DISBURSING AGENT

The Fund employs American Stock Transfer & Trust Company as its transfer
agent to record transfers of the shares, maintain proxy records and to process
distributions. The principal business office of such company is 40 Wall Street,
New York, NY, 10005.

FACTORS THAT MAY AFFECT FUTURE RESULTS, THE MARKET PRICE OF COMMON STOCK, AND
THE ACCURACY OF FORWARD-LOOKING STATEMENTS

In the normal course of its business, the Fund, in an effort to keep its
stockholders and the public informed about the Fund's operations and portfolio
of investments, may from time-to-time issue certain statements, either in
writing or orally, that contain or may contain forward-looking information.
Generally, these statements relate to business plans or strategies of the Fund
or Portfolio Companies in which it invests, projected or anticipated benefits or
consequences of such plans or strategies, projected or anticipated benefits of
new or follow-on investments made by or to be made by the Fund, or projections
involving anticipated purchases or sales of securities or other aspects of the
Fund's operating results. Forward-looking statements are not guarantees of
future performance and are subject to risks and uncertainties that could cause
actual results to differ materially. As noted elsewhere in this report, the
Fund's operations and portfolio of investments are subject to a number of
uncertainties, risks, and other influences, many of which are outside the
control of the Fund, and any one of which, or a combination of which, could
materially affect the results of the Fund's operations or net asset value, the
market price of its common stock, and whether forward-looking statements made by
the Fund ultimately prove to be accurate.

The following discussion outlines certain factors that in the future could
affect the Fund's results for 2000 and beyond and cause them to differ
materially from those that may be set forth in any forward-looking statement
made by or on behalf of the Fund:

LONG-TERM OBJECTIVE. The Fund is intended for investors seeking long-term
capital growth. The Fund is not meant to provide a vehicle for those who wish to
play short-term swings in the stock market. The portfolio securities acquired by
the Fund generally require four to seven years to reach maturity and generally
are illiquid. An investment in shares of the Fund should not be considered a
complete investment program. Each prospective purchaser should take into account
his investment objectives as well as his other investments when considering the
purchase of shares of the Fund.

NON-DIVERSIFIED STATUS; NUMBER OF INVESTMENTS. The Fund is classified as a
"non-diversified" investment company under the Investment Company Act, which
means the Fund is not limited in the proportion of its assets that may be
invested in the securities of a single issuer. Generally, the Fund does not
intend to initially invest more than 15% of the value of its net assets in a
single portfolio company.

12

However, follow-on investments or a disproportionate increase in the value of
one portfolio company may result in greater than 15% of the Fund's net assets
being invested in a single portfolio company. While these restrictions limit the
exposure of the capital of the Fund in any single investment, to the extent the
Fund takes large positions in the securities of a small number of issuers, the
Fund will be exposed to a greater risk of loss and the Fund's net asset value
and the market price of its common stock may fluctuate as a result of changes in
the financial condition, the stock price of, or in the market's assessment of
any single Portfolio Company to a greater extent than would be the case if it
were a "diversified" company holding numerous investments. The Fund currently
has investments in 26 Portfolio Companies, of which one exceeds 15% of the value
of its net assets and none of the remaining investments exceed 10%.

LEVERAGED PORTFOLIO INVESTMENTS. While leveraged buyout investments and
investments in highly leveraged companies offer the opportunity for significant
capital gains and current income, such investments involve a high degree of
business and financial risk and can result in substantial losses. The Fund's
Portfolio Companies incur substantial indebtedness in connection with leveraged
buyout or other highly leveraged transactions. Such indebtedness generally
represents from 66% to 90% of the capitalization of a Portfolio Company. In the
event a Portfolio Company cannot generate adequate cash flow to meet the
principal and interest payments on such indebtedness, the Fund's equity
investment could be reduced or eliminated through foreclosure on the Portfolio
Company's assets or the Portfolio Company's reorganization or bankruptcy. A
substantial portion of the indebtedness incurred by Portfolio Companies may bear
interest at rates that will fluctuate in accordance with a stated interest rate
index or the prime lending rate. The cash flow of a Portfolio Company may not be
sufficient to meet increases in interest payments on its indebtedness.
Accordingly, the profitability of the Fund's Portfolio Companies, as well as
appreciation of the investments in such companies, will depend in a significant
part upon prevailing interest rates.

LACK OF LIQUIDITY OF PORTFOLIO INVESTMENTS. The portfolio investments of
the Fund consist principally of securities that are subject to restrictions on
sale because they were acquired from the issuer in "private placement"
transactions or because the Fund is deemed to be an affiliate of the issuer.
Generally, the Fund will not be able to sell these securities publicly without
the expense and time required to register the securities under the Securities
Act and applicable state securities law unless an exemption from such
registration requirements is available. In addition, contractual or practical
limitations may restrict the Fund's ability to liquidate its securities in
Portfolio Companies since in many cases the securities of such companies will be
privately held and the Fund may own a relatively large percentage of the
issuer's outstanding securities. Sales may also be limited by securities market
conditions, which may be unfavorable for sales of securities of particular
issuers or issuers in particular industries. The above limitations on liquidity
of the Fund's securities could preclude or delay any disposition of such
securities or reduce the amount of proceeds that might otherwise be realized.

NEED FOR FOLLOW-ON INVESTMENTS IN PORTFOLIO COMPANIES. After its initial
investment in a Portfolio Company, the Fund may be called upon from time to time
to provide additional funds to such company or have the opportunity to increase
its investment in a successful situation, e.g., the exercise of a warrant to
purchase common stock. There is no assurance that the Fund will make, or have
sufficient funds to make, follow-on investments. Any decision by the Fund not to
make a follow-on investment or any inability on its part to make such an
investment may have a negative impact on a Portfolio Company in need of such an
investment or may result in a missed opportunity for the Fund to increase its
participation in a successful operation and may dilute the Fund's equity
interest in or reduce the expected yield on its investment.

COMPETITION FOR INVESTMENTS. The Fund encounters competition from other
persons or entities

13

with similar investment objectives. These competitors include leveraged buyout
partnerships, other business development companies, investment partnerships and
corporations, small business investment companies, large industrial and
financial companies investing directly or through affiliates, foreign investors
of various types and individuals. Many of these competitors have greater
financial resources and more personnel than the Fund and may be subject to
different and frequently less stringent regulation.

BORROWING. The Fund may borrow funds to make new or follow-on investments,
to maintain its pass-through tax status as a regulated investment company under
Subchapter M of the Code or to pay contingencies and expenses. The Fund is
permitted under the Investment Company Act to borrow funds if, immediately after
the borrowing, it will have an asset coverage of at least 200%. That is, the
Fund may borrow funds in an amount up to 50% of the value of its assets
(including investments made with borrowed funds). The amount and nature of any
Fund borrowings will depend upon a number of factors over which the Fund has no
control, including general economic conditions, conditions in the financial
markets and the impact of the financing on the tax treatment of the
stockholders. The use of leverage, even on a short-term basis, could have the
effect of magnifying increases or decreases in the Fund's net asset value. While
the "spread" between the current yield on the Fund's investments and the cost of
any loan would augment the stockholders' return from the Fund, if the spread
narrows (because of an increase in the cost of debt or insufficient income on
the Fund's investments), distributions to the stockholders would be adversely
affected. If the spread were reversed, the Fund might be unable to meet its
obligations to its lenders, which might then seek to cause the Fund to liquidate
some or all of its investments. There can be no assurance that the Fund would
realize full value for its investments or recoup all of its capital if its
portfolio investments were involuntarily liquidated.

The costs of borrowing money may exceed the income from the portfolio
securities purchased by the Fund with the borrowed money. The Fund will suffer a
decline in net asset value if the investment performance of the additional
securities purchased with borrowed money fails to cover their cost to the Fund
(including any interest paid on the money borrowed). A decline in net asset
value could affect the ability of the Fund to make distributions on its common
stock. Failure by the Fund to distribute a sufficient portion of its net
investment income and net realized capital gains could result in a loss of
pass-through tax status or subject the Fund to a 4% excise tax. See "Tax
Matters." If the asset coverage for debt securities issued by the Fund declines
to less than 200% (as a result of market fluctuations or otherwise), the Fund
may be required to sell a portion of its investments when it may be
disadvantageous to do so.

Because of the nature and size of its portfolio investments, the Fund
borrows money from time to time to make qualifying investments to maintain its
tax status under the Code. There can be no assurance that debt financing will be
available on terms that the Fund considers to be acceptable and in the best
interests of the Fund. If borrowing is unavailable, the Fund may be required to
make an untimely disposition of an investment or lose its pass-through tax
status. See "Loss of Conduit Tax Treatment" below.

LOSS OF CONDUIT TAX TREATMENT. The Fund may cease to qualify for conduit
tax treatment if it is unable to comply with the diversification requirements
contained in Subchapter M of the Code. Subchapter M requires that at the end of
each quarter (i) at least 50% of the value of the Fund's assets must consist of
cash, government securities and other securities of any one issuer that do not
represent more than 5% of the value of the Fund's total assets and 10% of the
outstanding voting securities of such issuer, and (ii) no more than 25% of the
value of the Fund's assets may be invested in the securities of any one issuer
(other than United States government securities), or of two or more issuers that
are controlled by the Fund and are engaged in the same or similar or related
trades or businesses. The Fund

14

will borrow funds if necessary to make qualifying investments to satisfy the
foregoing diversification requirements. If the Fund fails to satisfy such
diversification requirements and ceases to qualify for conduit tax treatment,
the Fund will be subject to income tax on its income and gains and stockholders
will be subject to income tax on distributions. The Fund may also cease to
qualify for conduit tax treatment, or be subject to a 4% excise tax, if it fails
to distribute a sufficient portion of its net investment income and net realized
capital gains.

MARKET VALUE AND NET ASSET VALUE. The shares of the Fund's common stock
are listed on the NYSE. Investors desiring liquidity may trade their shares of
Common Stock on the NYSE at current market value, which may differ from the then
current net asset value. Shares of closed-end investment companies frequently
trade at a discount from net asset value. This characteristic of shares of a
closed-end fund is a risk separate and distinct from the risk that the Fund's
net asset value will decrease. The risk of purchasing shares of a closed-end
fund that might trade at a discount is more pronounced for investors who wish to
sell their shares in a relatively short period of time because for those
investors, realization of a gain or loss on their investments is likely to be
more dependent upon the existence of a premium or discount than upon portfolio
performance. The Fund's shares have traded at a discount to net asset value
since they began trading. For information concerning the trading history of the
Fund's shares see "Market for Registrant's Common Stock and Related Stockholder
Matters."

VALUATION OF INVESTMENTS. The Fund's net asset value is based on the value
assigned to its portfolio investments. Investments in companies whose securities
are publicly traded are valued at their quoted market price, less a discount to
reflect the estimated effects of restrictions on the sale of such securities, if
applicable. The Fund adjusts its net asset value for changes in the value of its
publicly held securities on a daily basis. The value of the Fund's investments
in securities for which market quotations are not available is determined as of
the end of each calendar quarter, unless there is a significant event requiring
a change in valuation in the interim. Cost is used to approximate fair value of
such investments until significant developments affecting an investment provide
a basis for use of an appraisal valuation. Thereafter, such portfolio
investments are carried at appraised values as determined quarterly. Because of
the inherent uncertainty of the valuation of portfolio securities which do not
have readily ascertainable market values, the Fund's estimate of fair value may
significantly differ from the fair value that would have been used had a ready
market existed for the securities. At December 31, 1999, approximately 82% of
the Fund's fair value of portfolio securities were invested in securities for
which market quotations were not readily available. See "Valuation".

POSSIBLE VOLATILITY OF STOCK PRICE. The market price of the Fund's common
stock could be subject to significant fluctuations in response to variations in
the net asset value of the Fund, its quarterly operating results, and other
factors. The market price of the common stock may be significantly affected by
such factors as the announcement of new or follow-on investments in portfolio
companies, the sale or proposed sale of a portfolio investment, the results of
operations or fluctuations in the market prices or appraised value of one or
more of the Fund's portfolio companies, changes in earnings estimates by market
analysts, speculation in the press or analyst community and general market
conditions or market conditions specific to particular industries. From time to
time in recent years, the securities markets have experienced significant price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of particular companies. These broad fluctuations may
adversely affect the market price of the common stock. In addition, the Fund is
subject to the risk of the securities markets in which the portfolio securities
of the Fund are traded. Securities markets are cyclical and the prices of the
securities traded in such markets rise and fall at various times. These cyclical
periods may extend over significant periods of time.

15

REGULATION

The Investment Advisers Act generally prohibits investment advisers from
entering into investment advisory contracts with an investment company that
provides for compensation to the investment adviser on the basis of a share of
capital gains or capital appreciation of the portfolio investments or any
portion of the funds of the investment company or pursuant to a stock option
plan. The Investment Advisers Act, however, does permit the payment of
compensation based on capital gains or the issuance of incentive stock options
to management in an investment advisory contract between an investment adviser
and a business development company. The Fund has elected to be treated as a
business development company under the Investment Company Act. Accordingly, it
has provided for incentive compensation to the Management Company based on the
capital appreciation of the Fund's investments through March 31, 1997, and for
an incentive stock option plan thereafter.

The Fund may not withdraw its election to be treated as a business
development company without first obtaining the approval of a majority in
interest of its shareholders. The following brief description of the Investment
Company Act is qualified in its entirety by reference to the full text of the
Investment Company Act and the rules thereunder.

A business development company must be operated for the purpose of
investing in the securities of certain present and former "eligible portfolio
companies" or certain bankrupt or insolvent companies and must make available
significant managerial assistance to portfolio companies. An eligible portfolio
company generally is a company that (i) is organized under the laws of, and has
its principal place of business in, any state or states, (ii) is not an
investment company and (iii)(a) does not have a class of securities registered
on an exchange or included in the Federal Reserve Board's over-the-counter
margin list, (b) is actively controlled by the business development company
acting either alone or as part of a group acting together and an affiliate of
the business development company is a member of the portfolio company's board of
directors or (c) meets such other criteria as may be established by the SEC.
Control is presumed to exist where the business development company owns more
than 25% of the outstanding voting securities of a portfolio company.

"Making available significant managerial assistance" is defined under the
Investment Company Act to mean (i) any arrangement whereby a business
development company, through its directors, officers or employees, offers to
provide and, if accepted, does provide significant guidance and counsel
concerning the management, operations or business objectives or policies of a
portfolio company or (ii) the exercise of a controlling influence over the
management or policies of a portfolio company by the business development
company acting individually or as part of a group of which the business
development company is a member acting together which controls such company
("Managed Company"). A business development company may satisfy the requirements
of clause (i) with respect to a portfolio company by purchasing securities of
such a company as part of a group of investors acting together if one person in
such group provides the type of assistance described in such clause. However,
the business development company will not satisfy the general requirement of
making available significant managerial assistance if it only provides such
assistance indirectly through an investor group. A business development company
need only extend significant managerial assistance with respect to portfolio
companies which are treated as Qualifying Assets (as defined below) for the
purpose of satisfying the 70% test discussed below.

The Investment Company Act prohibits or restricts the Fund from investing
in certain types of companies, such as brokerage firms, insurance companies,
investment banking firms and investment companies. Moreover, the Investment
Company Act limits the type of assets that the Fund may acquire to "Qualifying
Assets" and certain assets necessary for its operations (such as office
furniture, equipment

16

and facilities) if, at the time of the acquisition, less than 70% of the value
of the Fund's total assets consists of qualifying assets. Qualifying Assets
include (i) securities of companies that were eligible portfolio companies at
the time that the Fund acquired their securities; (ii) securities of companies
that are actively controlled by the Fund; (iii) securities of bankrupt or
insolvent companies that are not otherwise eligible portfolio companies; (iv)
securities acquired as follow-on investments in companies that were eligible
portfolio companies at the time of the Fund's initial acquisition of their
securities but are no longer eligible portfolio companies, provided that the
Fund has maintained a substantial portion of its initial investment in such
companies; (v) securities received in exchange for or distributed on or with
respect to any of the foregoing; and (vi) cash items, government securities and
high-quality, short-term debt. The Investment Company Act also places
restrictions on the nature of the transactions in which, and the persons from
whom, securities can be purchased in order for such securities to be considered
Qualifying Assets. As a general matter, Qualifying Assets may only be purchased
from the issuer or an affiliate in a transaction not constituting a public
offering. The Fund may not purchase any security on margin, except such
short-term credits as are necessary for the clearance of portfolio transactions,
or engage in short sales of securities.

The Fund is permitted by the Investment Company Act, under specified
conditions, to issue multiple classes of senior debt and a single class of
preferred stock senior to the common stock if its asset coverage, as defined in
the Investment Company Act, is at least 200% after the issuance of the debt or
the senior stockholders' interests. In addition, provisions must be made to
prohibit any distribution to common shareholders or the repurchase of any shares
unless the asset coverage ratio is at least 200% at the time of the distribution
or repurchase.

The Fund generally may sell its securities at a price that is below the
prevailing net asset value per share only upon the approval of the policy by
shareholders holding a majority of the shares issued by the Fund, including a
majority of shares held by nonaffiliated shareholders. The Fund may, in
accordance with certain conditions established by the SEC, sell shares below net
asset value in connection with the distribution of rights to all of its
stockholders. The Fund may also issue shares at less than net asset value in
payment of dividends to existing shareholders.

Since the Fund is a closed-end business development company, stockholders
have no right to present their shares to the Fund for redemption. Recognizing
the possibility that the Fund's shares might trade at a discount, the Board of
Directors of the Fund has determined that it would be in the best interest of
stockholders for the Fund to be authorized to attempt to reduce or eliminate a
market value discount from net asset value. Accordingly, the Fund from time to
time may, but is not required to, repurchase its shares (including by means of
tender offers) to attempt to reduce or eliminate any discount or to increase the
net asset value of its shares, or both.

The Fund may repurchase its shares, subject to the restrictions of the
Investment Company Act. On September 28, 1999, the Board of Directors approved a
program to purchase up to 300,000 shares of the Fund's common stock pursuant in
open market transactions, to which the Fund repurchased 108,873 shares for
$1,211,298 through December 31, 1999. Such stock was repurchased at an average
discount of 32.3% from its net asset value.

Many of the transactions involving the Fund and its affiliates (as well as
affiliates of such affiliates) require the prior approval of a majority of the
Independent Directors and a majority of the Independent Directors having no
financial interest in the transactions. However, certain transactions involving
closely affiliated persons of the Fund, including the Management Company,
require the prior approval of the SEC. In general (a) any person who owns,
controls or holds with power to vote more than 5% of the outstanding shares, (b)
any director or executive officer and (c) any person who directly

17

or indirectly controls, is controlled by or is under common control with such
person, must obtain the prior approval of a majority of the Independent
Directors and, in some situations, the prior approval of the SEC, before
engaging in certain transactions involving the Fund or any company controlled by
the Fund. In accordance with the Investment Company Act, a majority of the
directors must be persons who are not "interested persons" as defined in such
act. Except for certain transactions which must be approved by the Independent
Directors, the Investment Company Act generally does not restrict transactions
between the Fund and its Portfolio Companies.

ITEM 2. PROPERTIES.

The Fund does not have an interest in any physical properties.

ITEM 3. LEGAL PROCEEDINGS.

The Fund, its affiliates and certain of the Portfolio Companies are
involved in asserted claims and have the possibility for unasserted claims which
may ultimately affect the net asset value of the Fund or the fair value of the
Fund's portfolio investments. In the opinion of Management, the financial
position or results of operations of the Fund will not be materially affected by
these claims.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders during the fourth
quarter of 1999.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

The Fund's shares of common stock began to trade on the New York Stock
Exchange on May 13, 1998, under the symbol "EQS". Prior to May 13, 1998, the
Fund's shares traded on the American Stock Exchange under the same symbol. The
Fund had approximately 7,469 shareholders at December 31, 1999, 1,494 of which
were registered holders. Registered holders do not include those shareholders
whose stock has been issued in street name. The net asset value per share of the
Fund's common stock at December 31, 1999, was $16.61.

The following table reflects the high and low sales prices per share of
the Fund's common stock on the New York Stock Exchange or American Stock
Exchange for the two years ended December 31, 1999, by quarter.

QUARTER
ENDED HIGH LOW
-------- ------- -------
03/31/98 $28.875 $22.125
06/30/98 $28.563 $26.063
09/30/98 $26.500 $17.625
12/31/98 $19.500 $15.188
03/31/99 $16.625 $14.063
06/30/99 $16.250 $14.188
09/30/99 $16.750 $14.875
12/31/99 $16.312 $10.125


As a regulated investment company under Subchapter M of the Code, the Fund
is required to distribute to its shareholders, in a timely manner, at least 90%
of its taxable net investment income each year. If the Fund distributes, in a
timely manner, 98% of its

18

taxable net capital gains and 98% of its taxable net investment income each year
(as well as any portion of the respective 2% balances not distributed in the
previous year), it will not be subject to the 4% non-deductible federal excise
tax on certain undistributed income of regulated investment companies. Under the
Investment Company Act, the Fund is not permitted to pay dividends to
shareholders unless it meets certain asset coverage requirements.

Historically, net investment income and net realized gains from the sale
of portfolio investments have been distributed at least annually. The Fund
declared dividends of $23,814,714 ($4.25 per share), $3,138,520 ($0.65 per
share) and $2,380,327 ($0.50 per share) during 1999, 1998 and 1997,
respectively. The Fund has adopted a policy to make dividend distributions of at
least $0.50 per share on an annual basis. In the event that taxable income,
including realized capital gains, exceeds $0.50 per share in any year,
additional dividends may be declared to distribute such excess. The 1999 and
1998 dividends were paid in additional shares of common stock or in cash by
specific election of the shareholder in December 1999 and 1998, respectively,
and represented long-term capital gains. The 1997 dividend, which represented a
return of capital for tax purposes, was paid in additional shares of common
stock or in cash by specific election of the shareholders in January 1998. The
Fund paid $9,511,374, $991,853 and $828,556 in cash and issued 1,337,542,
125,812, and 67,837 additional shares of stock at $10.69375, $17.0625 and
$22.875 per share in December 1999 and 1998 and January 1998, respectively, in
connection with such dividends.

The Fund is investing in companies that it believes have a high potential
for capital appreciation, and the Fund intends to realize the majority of its
profits upon the sale of its investments in Portfolio Companies. Consequently,
most of the companies in which the Fund invests do not have established policies
of paying annual dividends.

A portion of the investments in portfolio securities held by the Fund is
comprised of interest-bearing subordinated debt securities or dividend-paying
preferred stock. The Fund will continue to distribute taxable net investment
income earned on these investments from time to time, to the extent not retained
for follow-on investments, expenses and contingencies. If taxable net investment
income is retained, the Fund will be subject to federal income tax.

The Fund reserves the right to retain net long-term capital gains in
excess of net short-term capital losses for reinvestment or to pay contingencies
and expenses. Such retained amounts, if any, will be taxable to the Fund as
long-term capital gains and shareholders will be able to claim their
proportionate share of the federal income taxes paid by the Fund on such gains
as a credit against their own federal income tax liabilities. Stockholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.

19

ITEM 6. SELECTED FINANCIAL DATA.

Following is a summary of selected financial data and per share data of
the Fund and its predecessors for the five years ended December 31, 1999.
Amounts are in thousands except per share data.


1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------

Total investment income ........ $ 5,157 $ 3,774 $ 4,013 $ 2,590 $ 3,075

Net investment loss ............ $ (2,177) $ (2,179) $ (922) $ (8,267) $ (668)

Realized gain (loss) on sales
of portfolio securities, net $ 40,353 $ (3,564) $ 7,566 $ 4,037 $ 7,669

Increase (decrease) in
unrealized appreciation of
portfolio securities, net ... $ (45,412) $ (21,581) $ 24,222 $ 33,696 $ (1,281)

Total increase (decrease) in
net assets from operations .. $ (7,237) $ (27,324) $ 30,865 $ 29,467 $ 5,720

Dividends ...................... $ 23,815 $ 3,139 $ 2,380 $ 3,180 $ 5,815

Total assets at end of year .... $ 175,022 $ 215,603 $ 228,095 $ 181,166 $ 132,450

Net assets at end of year ...... $ 101,419 $ 116,155 $ 144,471 $ 103,223 $ 61,853

Net cash used by operating
activities .................. $ (3,303) $ (4,298) $ (1,043) $ (2,494) $ (403)

Shares outstanding at end
of year ..................... 6,108 4,954 4,828 4,301 3,139

Average shares outstanding
during year ................... 4,950 4,829 4,733 3,819 2,968


PER SHARE DATA:

1999 1998 1997 1996 1995
--------- --------- --------- --------- ---------

Net investment loss ............ $ (0.44) $ (0.45) $ (0.19) $ (2.16) $ (0.22)

Realized gain (loss) on sales
of portfolio securities, net $ 8.15 $ (0.74) $ 1.60 $ 1.06 $ 2.58

Increase (decrease) in
unrealized appreciation of
portfolio securities, net ... $ (9.17) $ (4.47) $ 5.11 $ 8.82 $ (0.43)

Dividends ...................... $ 4.25 $ 0.65 $ 0.50 $ 0.76 $ 2.00

Net asset value (including
unrealized appreciation),
end of year ................. $ 16.61 $ 23.45 $ 29.92 $ 24.00 $ 19.71


20

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

LIQUIDITY AND CAPITAL RESOURCES

At December 31, 1999, the Fund had $115,373,205 of its assets invested in
portfolio securities of 26 companies, and has committed to invest up to an
additional $1,123,766 in three of such companies. Current temporary cash
investments, anticipated future investment income, proceeds from borrowings, and
proceeds from the sale of existing portfolio securities are believed to be
sufficient to finance these commitments. At December 31, 1999, the Fund had
$22,400,000 outstanding on a $40,000,000 revolving line of credit loan from a
bank.

Net cash used by operating activities was $3,302,678, $4,298,452 and
$1,043,710 for the three years ended December 31, 1999, respectively.

At December 31, 1999, the Fund had $50,334,180 of its total assets of
$175,022,415 invested in temporary cash investments consisting of money market
securities. This amount includes proceeds of $50,000,000 from a $100,000,000
note payable to a bank that is utilized to enable the Fund to achieve adequate
diversification to maintain its pass-through tax status as a regulated
investment company. Such amount was repaid to the bank on January 3, 2000.

The Fund has the ability to borrow funds and issue forms of senior
securities representing indebtedness or stock, such as preferred stock, subject
to certain restrictions. Net investment income and net realized gains from the
sales of portfolio investments are intended to be distributed at least annually,
to the extent such amounts are not reserved for payment of contingencies or to
make follow-on or new investments. Management believes that the availability
under its line of credit, as well as the ability to sell its investments in
publicly traded securities, are adequate to provide payment for any expenses and
contingencies of the Fund.

The Fund reserves the right to retain net long-term capital gains in
excess of net short-term capital losses for reinvestment or to pay contingencies
and expenses. Such retained amounts, if any, will be taxable to the Fund as
long-term capital gains and stockholders will be able to claim their
proportionate share of the federal income taxes paid by the Fund on such gains
as a credit against their own federal income tax liabilities. Stockholders will
also be entitled to increase the adjusted tax basis of their Fund shares by the
difference between their undistributed capital gains and their tax credit.

The Fund may repurchase its shares, subject to the restrictions of the
Investment Company Act. On September 28, 1999, the Board of Directors approved a
program to purchase up to 300,000 shares of the Fund's common stock, pursuant to
which the Fund repurchased 108,873 shares for $1,211,298 through December 31,
1999. Such stock was repurchased at an average discount of 32.3% from its net
asset value.

RESULTS OF OPERATIONS

INVESTMENT INCOME AND EXPENSE

Net investment loss after all expenses amounted to $2,177,164, $2,178,659
and $922,117 for the three years ended December 31, 1999. Income from portfolio
securities was $5,060,617 in 1999, $3,726,430 in 1998 and $3,926,814 in 1997.
Amounts invested in interest- and dividend- bearing portfolio securities were
higher during 1999 as compared to 1998 and 1997. Interest from temporary

21

cash investments was $57,908 in 1999, $48,004 in 1998, and $85,861 in 1997. The
decrease in 1999 and 1998 as compared to 1997 was a result of lower investable
balances throughout the year. Interest income on notes receivable from officers
was $38,405 during 1999. The notes receivable from the officers of the Fund were
received on September 30, 1999 as payment for common stock issued upon exercise
of stock options pursuant to the Stock Incentive Plan discussed below.

The larger net investment loss in 1999 and 1998 as compared to 1997 was
primarily attributable to interest expense which increased to $2,163,593 and
$1,970,973 in 1999 and 1998, respectively, as compared to $429,940 in 1997. In
addition, due to the limited recourse provision of the notes receivable from the
officers issued in 1999, generally accepted accounting principles require that
any dividends paid on the non-recourse portion of the notes be treated as
non-cash compensation expense in the statement of operations. Accordingly, the
Fund recorded non-cash compensation expense of $2,085,766 related to its
dividend in 1999. The amount of the compensation expense was also recorded as an
increase in additional paid in capital, and therefore had no effect on the
Fund's net asset value.

Mailing, printing and other expenses were $214,947 during 1999, as
compared to $383,664 during 1998 and $337,531 during 1997, due to the lower cost
for the preparation and distribution of the annual report and proxy statement
for the annual shareholders' meeting to be held in May 2000. Interest expense
was $2,163,593 in 1999 as compared to $1,970,973 in 1998 and $429,940 in 1997
due to changes in the average daily balances outstanding on the lines of credit
to $26,855,068 in 1999, from $23,469,957 in 1998 and $4,284,027 in 1997.

Professional fees decreased to $279,141 during 1999 as compared to
$490,954 during 1998 and $520,161 during 1997. The decrease in 1999 compared to
1998 and 1997 is due primarily to the higher costs associated with the New York
Stock Exchange listing in 1998 and the Special Meeting of Stockholders (the
"Special Meeting") held during 1997. In addition, in 1997, the costs included
the Fund's portion of the independent third party appraisal of the Fund's
investment in portfolio securities and the legal expenses related to the filing
of an application for an exemptive order with the SEC related to the
restructuring of management compensation.

The Management Company receives management fee compensation at an annual
rate of 2% of the net assets of the Fund paid quarterly in arrears. Such fees
amounted to $2,179,413, $2,706,325 and $2,794,795 during 1999, 1998 and 1997,
respectively. The lower amount during the year ended December 31, 1999 was due
to the decrease in net assets during the year.

Through March 31, 1997, the Management Company also received a management
incentive fee equal to 20% of net realized capital gains less unrealized capital
depreciation, computed on a cumulative basis over the life of the Fund.
Management incentive fees of $55,825 were accrued during the year ended December
31, 1997. Deferred management incentive fee expense for the year ended December
31, 1997 totaled $426,501. Pursuant to a vote of the stockholders at the Special
Meeting, the Fund entered into a new management agreement with the Management
Company which eliminated incentive fees based on capital gains effective April
1, 1997. Pursuant to the vote of the stockholders, the deferred incentive fee of
$11,210,529 at March 31, 1997, was paid on May 15, 1997, by the issuance of
459,973 unregistered shares of common stock of the Fund. The number of shares
issued was determined by dividing the deferred incentive fee by $24.37 per
share, the net asset value per share at March 31, 1997.

Shareholders have approved the Equus II Incorporated 1997 Stock Incentive
Plan ("Stock Incentive Plan") which authorizes the Fund to issue options to the
directors and officers of the Fund in an aggregate amount of up to 20% of the
outstanding shares of common stock of the Fund. Implementation of this plan was
subject to the receipt of an exemptive order from the SEC, which was received on
May

22

8, 1997.

The Stock Incentive Plan also provides that each director who is not an
officer of the Fund is, on the first business day following each annual meeting,
granted an incentive stock option to purchase 2,000 shares of the Fund's common
stock. On May 7, 1999, options to acquire a total of 12,000 shares at $15.56 per
share were issued to the directors. During 1999, two directors each exercised
1,000 of their options to acquire a total of 2,000 shares for $15.5625 per
share.

Under the Stock Incentive Plan, options to purchase 294,773 and 939,131
shares of the Fund's common stock with a weighted average exercise price of
$19.07 and $17.66 per share were outstanding at December 31, 1999 and 1998,
respectively. The Fund had 91,150 and 671,849 shares in exercisable options with
a weighted average exercise price per share of $22.33 and $17.58 at December 31,
1999 and 1998, respectively. Outstanding options at December 31, 1999 have
exercise prices ranging from $15.56 to $27.44 and expire in May 2007 through May
2009. On September 30, 1999, options to purchase 654,358 shares of common stock
of the Fund were exercised by the officers of the Fund for $17 per share. The
exercise price of $11,124,086 was paid in the form of promissory notes from the
officers to the Fund. The notes bear interest at 5.42% per annum, have limited
recourse and are due on or before September 30, 2008. The notes are secured by
the 654,358 shares, including any proceeds or dividends paid thereon. During
1999, a dividend of $4.25 per share was paid. As a result of the dividend,
135,608 additional shares were issued to the officers and pledged to the Fund.
In addition, principal payments of $991,161, representing 58,304 shares, were
made on the notes. As a result of the additional shares issued and payments
made, the notes are secured by 789,966 shares of common stock and the
outstanding note balance is $10,132,925.

The notes receivable, as well as 731,662 of such shares of common stock,
are not included in the Fund's net asset value per share. The shares of stock
financed by the notes from the officers will be included in the net asset value
per share as the shares are paid for or released from collateral. Shares may be
released as payments on the notes are made or as the value of the collateral
increases. Generally accepted accounting principles require that the options
issued to the officers be accounted for using variable plan accounting due to
the limited recourse provision of such notes. Additionally, the dividends paid
on the non-recourse portion of the notes are required to be recorded as
compensation expense in the statements of operations, and interest recorded on
the non-recourse portion of the notes is required to be recorded as an increase
to additional paid-in capital. Accordingly, for the year ended December 31,
1999, dividends of $2,085,766 were recorded as non-cash compensation expense and
interest of $115,217 was credited to additional paid-in capital. Additionally,
the limited recourse note receivable from the officers is required to be
recorded as a reduction of net assets. If the notes and the shares were included
in the Fund's balance sheet, the net asset value would have been $16.31 per
share at December 31, 1999.

As of December 31, 1999 and 1998, all outstanding options were "out of the
money" and would not have had a dilutive effect on net assets per share if
exercised, assuming the Fund would use the proceeds from the exercise of such
options to repurchase shares at the market price pursuant to the treasury stock
method.

REALIZED GAINS AND LOSSES ON SALES OF PORTFOLIO SECURITIES

During the year ended December 31, 1999, the Fund realized a net capital
gain of $40,352,644 from the sale of securities of Portfolio Companies as
follows:

o 54,334 shares of United Rentals, Inc. for $1,738,036, realizing a capital
gain of $1,737,639;

23

o 135,472 common shares of United States Filter Corporation for $3,884,978,
realizing a capital gain of $2,324,700;

o 100,000 shares of Allied Waste Industries, Inc. common stock for
$1,832,122, realizing a capital gain of $1,357,966;

o 1,125,000 shares of American Residential Services, Inc. for $6,468,750,
realizing a capital gain of $3,468,478;

o 149,337 shares of Travis International, Inc. for $6,668,987, realizing a
capital gain of $6,114,095;

o its investments in HTD Corporation for $12,877,114, realizing a capital
gain of $3,341,547;

o its investment in CRC Holdings, Corp., realizing a capital gain of
$12,128,572;

o its investment in Carruth-Doggett Industries, Inc. for $7,309,250,
realizing a capital gain of $5,059,250;

o its investment in CDI Rental Services Inc. for $2,103,250, realizing a
capital gain of $103,250; and

o 474,942 shares of Garden Ridge Corporation for $5,461,833, resulting in a
capital gain of $4,776,803.

During 1999, the Fund sold CRC Holdings to LG&E Corp. ("LGE") and received
$12,128,572 in cash and 121,504 shares of LGE common stock. An additional
115,860 shares of LGE stock are being held in escrow to secure contractual
representations and warranties. In addition, LGE is obligated to pay up to an
additional $11.7 million to the Fund if the CRC business sold to LGE achieves
certain annual levels of financial performance through March 31, 2002.

The Fund also realized a capital gain as a result of the receipt of
$654,570 in additional compensation from the escrow account related to the 1998
sale of WMW Industries. In addition, Atlas Acquisition paid $128,298 in
principal on its outstanding junior participation note and the Fund realized a
loss of $721,702 on the remaining balance of the note. The Fund also realized a
capital gain as a result of the receipt of $7,536, as payment on preferred stock
of Springtime, Inc., which had been previously written off as having no value.
In addition, a capital loss of $60 was realized on the write-off of CDR Fleet
Services as a result of the CDI Rental Services and Carruth-Doggett Industries,
Inc. sale.

During the year ended December 31, 1998, the Fund realized a net capital
loss of $3,563,556 from the sale or write-off of securities of eleven Portfolio
Companies as follows:

o 143,112 shares of Coach USA, Inc. common stock for $6,620,305, realizing a
capital gain of $4,756,948;

o 32,128 shares of United States Filter Corporation common stock for
$1,059,964, realizing a capital gain of $679,111;

o 225,000 shares of Allied Waste Industries, Inc. for $4,710,866, realizing
a capital gain of $3,644,015;

o its investment in Atlas Acquisition, Inc. was written off, realizing a
capital loss of $2,000,000;

o its investment in Brazos Sportswear, Inc. was written off, realizing a
capital loss of $8,235,367; and

24

o its investment in Restaurant Development Group was liquidated, realizing a
capital loss of $2,089,432.

In addition, the Fund realized a capital gain due to the receipt of $6,825
in additional compensation from the escrow account related to the 1997 sale of
Cardiovascular Ventures, Inc. The Fund realized a capital loss of $735,525 on
the conversion of its prime + 1% note due from Triad Medical Inc. into a
non-interest bearing loan due in 2005. The value of the note was discounted by
$735,525, representing original issue discount that will be accreted to income
over the life of the loan. The Fund also realized a loss of $212,980 from the
reduction in the value of the royalty receivable due from United Rentals, Inc.
related to the 1997 sale of J&J Rental Services, Inc. The Fund realized a
capital gain due to the receipt of additional proceeds of $575,708 related to
the 1997 sale of the Fund's investment in Industrial Equipment Rentals, Inc. The
Fund also realized a capital gain due to the receipt of $47,141, as payment on
preferred stock of Springtime, Inc., which had been previously written off as
having no value.

During the year ended December 31,1997, the Fund had a net realized
capital gain of $7,565,699 from the sale of investments in eight Portfolio
Companies, as follows:

o 251,449 shares of Allied Waste Industries, Inc. for $4,236,177, realizing
a capital gain of $3,163,942;

o 96,035 shares of American Residential Services, Inc. for $2,186,926,
realizing a capital gain of $2,130,098;

o its investment in Industrial Equipment Rentals, Inc. for $6,736,956,
realizing a capital gain of $4,370,256;

o its investment in J&J Rental Services, Inc. and 62,149 share of United
Rentals, Inc. of $2,977,400, including an $840,000 receivable, realizing a
capital gain of $977,400;

o its investment in David's Supermarkets for $5,546,800, realizing a capital
gain of $1,477,350; and

o its investment in Midway Airlines for $271,000, realizing a capital loss
of $3,943,226.

In August 1997, the Fund sold its investment in Cardiovascular Ventures,
Inc. to Raytel Medical Corporation ("RTEL") receiving cash proceeds of
$2,170,891 and 33,073 shares of RTEL common stock, valued at $330,730. The Fund
recognized a capital loss of $121,621 on such sale. In December 1997, the Fund
realized a loss of $488,500 on its investment in A.C. Liquidating preferred
stock which was deemed worthless.

UNREALIZED APPRECIATION AND DEPRECIATION OF PORTFOLIO SECURITIES

Net unrealized appreciation on investments decreased $45,412,285 during
the year ended December 31, 1999, from unrealized appreciation of $44,311,697 to
unrealized depreciation of $1,100,588. Such net decrease resulted from decreases
in the estimated fair value of securities of nine of the Fund's Portfolio
Companies aggregating $24,818,186, an increase in the estimated fair value of
securities of seven of the Fund's Portfolio Companies of $9,528,986 and the
transfer of $30,123,085 in net unrealized appreciation to net realized gains
from the sale or disposition of investments in ten Portfolio Companies. The
significant increase in net unrealized depreciation in 1999 as compared to 1998
was primarily attributable to the transfer of unrealized appreciation resulting
from the sales of CRC Holdings, Inc. and Travis International, Inc. and the
decline in stock prices of the Fund's publicly-traded securities.

25

Net unrealized appreciation on investments decreased $21,581,656 during
the year ended December 31, 1998, from $65,893,353 to $44,311,697. Such net
decrease resulted from decreases in the estimated fair value of securities of
eight of the Fund's Portfolio Companies aggregating $35,408,412, an increase in
the estimated fair value of securities of twelve portfolio companies of
$30,539,019, and the transfer of $5,504,231 and $11,208,032 in net unrealized
appreciation to net realized losses from the sale of investments in three
companies and the write off of investments in two companies, respectively. The
significant decrease in net unrealized appreciation in 1998 as compared to 1997
is primarily attributable to the decline in stock price of the Fund's
publicly-traded securities, the write down of investments in two other portfolio
companies providing equipment and services to the oil and gas industry and the
write off of investments in two other portfolio companies.

Net unrealized appreciation of investments increased $24,221,889 during
the year ended December 31, 1997, from $41,671,464 to $65,893,353. Such net
increase resulted from increases in the estimated fair value of securities of
twelve of the Fund's Portfolio Companies aggregating $33,857,604, a decrease in
the estimated fair value of securities of five Portfolio Companies of $9,475,904
and the transfer of $159,811 in net unrealized appreciation to net realized
gains from the sale of investments in six companies.

DIVIDENDS

The Fund declared dividends of $23,814,714 ($4.25 per share), $3,138,520
($0.65 per share) and $2,380,327 ($0.50 per share) during 1999, 1998 and 1997,
respectively. The Fund has adopted a policy to make dividend distributions of at
least $0.50 per share on an annual basis. In the event that taxable income,
including realized capital gains, exceeds $0.50 per share in any year,
additional dividends may be declared to distribute such excess. The 1999 and
1998 dividends represented long-term capital gains and were paid in additional
shares of common stock or in cash by specific election of the shareholders in
December 1999 and 1998, respectively. The 1997 dividend, which represented a
return of capital for tax purposes, was paid in additional shares of common
stock or in cash by specific election of the shareholders in January 1998. The
Fund paid $9,511,374, $991,853 and $828,556 in cash and issued 1,337,542,
125,812 and 67,837 additional shares of stock at $10.69375, $17.0625 and $22.875
per share, in December 1999 and 1998 and January 1998, respectively, in
connection with such dividends. The stock issued in January 1998 is reflected as
outstanding as of December 31, 1997 in the accompanying financial statements.

PORTFOLIO INVESTMENTS

During the year ended December 31, 1999, the Fund invested $20,638,398 in
six new companies and made follow-on investments of $10,591,965 in eleven
portfolio companies. These follow-on investments include $1,388,132 in accrued
interest and dividends received in the form of additional portfolio securities
and accretion of original issue discount on a promissory note. The Fund also
received note payments and proceeds from the sale of portfolio securities of
$4,933,338 in the form of additional portfolio securities.

On January 29, 1999, Brazos Sportswear, Inc. filed a voluntary petition
under Chapter 11 of the Bankruptcy Code. The Fund's investment in Brazos
Sportswear, Inc. was written off as of December 31, 1998.

In February 1999, unaffiliated co-investors in Equicom, Inc. ("Equicom")
purchased 48,000 shares of Equicom's common stock at its original cost of
$15,000 from the Fund. Co-investors in

26

Equicom also purchased $1,043,500 of the $2,682,000 10% promissory note due to
the Fund. During the year ended December 31, 1999, the Fund invested $1,143,810
in Equicom and received 114,381 shares of preferred stock. In addition, in 1999,
the Fund advanced an additional $352,254 to Equicom pursuant to the 10%
promissory note.

In February 1999, the Fund invested $2,000,000 in CDI Rental Services,
Inc., a company primarily focused on acquiring existing construction equipment
rental businesses. The Fund's investment consisted of a 10% senior subordinated
promissory note and warrants to buy up to 12,500 and 21,250 shares of common
stock for $0.01 and $0.0127 per share, respectively, through February 2009. In
September 1999, the Fund purchased 5,972 shares of common stock of CDR Fleet
Services for $60.

In March 1999, OEI International, Inc. ("OEI") merged into Petrocon
Engineering, Inc. ("Petrocon"). The Fund exchanged its investment in OEI of
$2,500,000 in a promissory note and accrued interest of $159,332, its investment
in Petrocon of $2,500,000 in a promissory note and accrued interest of $163,356,
warrants to purchase 1,000,000 common shares of Petrocon and $2,000,000 in a
cash advance for a 12% senior subordinated note from Petrocon in the amount of
$4,663,356, $2,659,332 in an 8% Series B junior subordinated note and warrants
to purchase 1,552,571 shares of Petrocon common stock. The Fund also exchanged
its investment in 566,201 common shares of OEI for 887,338 shares of Petrocon
common stock.

In March 1999, the Fund acquired 499 common shares of Champion Window,
Inc. ("Champion") for $499. Champion was formed to acquire the assets of a
company that manufactures aluminum windows for residential use. In May 1999,
this acquisition was completed and the Fund acquired 1,399,501 additional shares
of common stock and 20,000 shares of preferred stock of Champion for $1,399,501
and $2,000,000 respectively. In addition, the Fund advanced $3,500,000 to
Champion in exchange for a 12% subordinated promissory note.

In March 1999, the Fund received 5,172 additional common shares of U.S.
Filter related to a purchase price adjustment from the 1998 sale of WMW
Industries, Inc. to U.S. Filter. The transaction with U.S. Filter in 1998 was a
tax-free exchange; therefore the Fund did not realize a capital gain from the
receipt of these additional common shares. In June 1999, U.S. Filter released
$654,570 of additional cash which had been held in escrow to the Fund. This
amount was recorded as a capital gain.

In the first quarter of 1999, the Fund acquired 6,000 shares of Series B
8% preferred stock from Hot & Cool Holdings, Inc. for $300,000. During the
second quarter of 1999, the Fund advanced $500,000 to Hot & Cool Holdings, Inc.
in exchange for a 12% subordinated promissory note. During the third quarter of
1999, the Fund received 7,518 shares of Hot & Cool Series A 8% preferred stock
in payment of $45,000 on the 9% promissory note and $255,735 in payment of
accrued interest receivable. During the fourth quarter of 1999, the Fund
acquired 5,000 shares of Series C preferred stock and a warrant to purchase
10,000 shares of common stock for $0.01 for $500,000.

During the quarter ended March 31, 1999, the Fund advanced $655,769 to
Tulsa Industries, Inc. pursuant to a 8.75% junior participation in a promissory
note. During the fourth quarter of 1999, Tulsa Industries, Inc. was
restructured. The Fund acquired 1,058 shares of Series B preferred stock for
$1,058,000. In addition, pursuant to the restructuring, the Fund exchanged its
546,615 shares of Series A preferred stock for 181,589 shares of common stock
and surrendered its warrant to purchase 31,731 shares.

In April 1999, the Fund sold its interest in American Residential
Services, Inc. ("ARS"), to The ServiceMaster Company ("SVM") and in conjunction
with such sale, the Fund's warrants to buy 100,000

27

shares of ARS for $15 per share were converted into warrants to buy 29,411
shares of SVM for $51 per share through September 2001.

In May 1999, the Fund acquired 3,167,756 shares of Turfgrass America, Inc.
("Turfgrass") common stock for $600,000 and advanced $3,400,000 in exchange for
a 12% subordinated promissory note, with a face value at maturity of $4,000,000
from Turfgrass. Turfgrass grows, sells and installs warm season turfgrasses,
commonly referred to as "sod", for residential, commercial and sports
applications. During 1999, the original issue discount accretion amounted to
$75,000.

During the second quarter 1999, Travis International, Inc. completed a 4.5
to 1 stock split pursuant to which the Fund received an additional 76,814 shares
of common stock.

On July 26, 1999, the Fund exercised its warrant to buy 125,000 shares of
common stock of Allied Waste Industries, Inc. for $625,000.

In July 1999, the Fund sold its interest in CRC Holdings, Inc. ("CRC") to
LG&E Energy Corp ("LGE"). The Fund received $12,128,572 in cash and 121,504
shares of LGE common stock valued at $2,039,748 on the date such shares were
received. In addition, the Fund was repaid its $959,700 promissory note due from
CRC, and 115,860 shares of LGE common stock are being held in escrow to support
representations and warranties made by the Fund in the sale agreement. The Fund
is entitled to additional consideration of up to $11.7 million pursuant to an
earn-out agreement that is based on the performance of CRC over its last two and
the next three fiscal years.

For the year ended December 31, 1999, the Fund advanced $524,000 to The
Drilltec Corporation pursuant to a prime + 9.75% promissory note. In addition,
the Fund received warrants to buy 10% of the company through September 2002.

During the third quarter 1999, the Fund received an additional 755,155
shares of common stock of Paracelsus Healthcare Corporation ("PLS") pursuant to
a purchase price adjustment related to the merger of Champion Healthcare
Corporation, a former portfolio company, with PLS in 1996.

For the year ended December 31, 1999, the Fund received an additional
5,612 and 1,248 shares of preferred stock of Container Acquisition, Inc. and
Sovereign Business Forms, Inc. in payment of $561,200 and $124,800 in dividends,
respectively. In addition, in October 1999, the Fund advanced $1,500,000 to
Sovereign pursuant to a 15% promissory note and received a warrant to buy
273,450 shares of Sovereign common stock for $1 per share through October 2009.

During the year ended December 31, 1999, the original issue discount
accretion for the discounted $2,025,000 non-interest-bearing note due from HTD
Corporation ("HTD") amounted to $33,037. Such original issue discount was being
accreted over the life of the note, but the remaining balance was recognized as
a capital gain during the second quarter as a result of the sale of HTD and
payment in full of the note.

In December 1999, the Fund received 35,000 shares of common stock valued
at $101,500, 35,000 shares of preferred stock valued at $1,929,000 and an 8%
promissory note in the amount of $1,138,000 from Equipment Support Services,
Inc. ("ESS") in conjunction with the sale of its investments in Carruth-Doggett
Industries, Inc. and CDI Rental Services, Inc. ESS is involved in the sales and
rental of construction and farm equipment.

During the fourth quarter of 1999, the Fund received 285,000 Class A units
of equity interest in

28

Spectrum Management, LLC ("Spectrum") for $2,850,000. Spectrum provides security
devices to financial institutions.

During the year ended December 31, 1998, the Fund invested $13,645,100 in
three new companies and made follow-on investments of $33,087,284 in eleven
portfolio companies, including $1,998,989 in dividends and accrued interest
received in the form of additional portfolio securities and accretion of
original issue discount on a promissory note.

During the year ended December 31, 1997, the Fund invested $27,644,902 in
eleven new companies and made follow-on investments of $5,952,669 in eight
portfolio companies, including $1,238,434 in dividends and accrued interest
received in the form of additional portfolio securities and $330,730 in
securities received upon the sale of securities of another portfolio company.

For a description of the business of each Portfolio Company in which the
Fund has invested, see "Current Portfolio Companies".

Of the companies in which the Fund has investments at December 31, 1999,
only AW, DYPR, LGE, NCS, PLS, RTEL and SVM, are publicly held. The others each
have a small number of shareholders and do not generally make financial
information available to the public. However, each company's operations and
financial information are reviewed by Management to determine the proper
valuation of the Fund's investment. See "Valuation".

YEAR 2000

Many computer software systems could not properly process date-related
information from and after January 1, 2000. Should any of the computer systems
employed by the Management Company, any of the Fund's other major service
providers, or companies in which the Fund has an investment, fail to process
this type of information properly, that could have a negative impact on the
Fund's operations and the services provided to the Fund's stockholders.

In order to address the Year 2000 issue, the Management Company identified
its computer systems to be replaced and modified for the Year 2000 compliance
with installation completed by year end. In addition, the Fund completed its
inquiry of its major service providers as well as its Portfolio Companies to
determine if they were in the process of reviewing their systems with the same
goals. As of December 31, 1999, the Fund had received assurances from all of its
major service providers and its Portfolio Companies regarding Year 2000
compliance. However, although the Fund had received assurances, there could be
no guarantee that Year 2000 problems originating from these third parties, whose
systems affect the Fund, would not occur. The Fund did not incur any expenses
related to Year 2000 issues.

As of February 29, 2000, the Fund has not experienced and does not
anticipate any significant problems related to the Year 2000 issue. The Fund's
revenue and spending patterns were not affected by any issues related to the
Year 2000 problem. Based on information available at this time, the Fund cannot
be certain that Year 2000 problems originating internally or from its major
service providers or Portfolio Companies will not occur. The Fund will develop a
plan to address problems related to the Year 2000 if problems are identified.

SUBSEQUENT EVENTS

Subsequent to December 31, 1999, the Fund repaid a net $55,100,000 of
notes payable to the

29

bank.

From January through February 29, 2000, the Fund repurchased an additional
94,631 shares of common stock for $959,060.

Subsequent to December 31, 1999, the Fund advanced an additional $160,000
to The Drilltec Corporation on a prime +9.75% promissory note and $147,746 to
Equicom, Inc. on a 10% promissory note.

In February 2000, the Fund realized a capital gain as a result of the
receipt of $654,570 in additional compensation for the escrow account related to
the 1998 sale of WMW Industries.

In February 2000, the Fund advanced an additional $500,000 to Hot and Cold
Holdings, Inc. under a 12% promissory note.

On February 28, 2000, the Fund purchased 80,951 shares of common stock of
Doane Pet Care Enterprises, Inc. ("Doane") for $726,565 from a current
shareholder of Doane. The Fund indirectly owns 1,039,968 shares of Doane common
stock through its ownership of Summit/DPC Partners. The shares of Doane were
purchased subject to the existing Doane shareholders' right of first refusal
after an independent third party offered to buy the shares from the current
shareholder. The Fund's investment in Summit/DPC was valued at $5,500,000 at
December 31,1999. The fair value of the Fund's investment, using the price paid
in this transaction, will be raised to $9,300,000 effective March 1, 2000.

In February 2000, the Fund committed to invest up to $3,000,000 in
Sternhill Partners I, L.P., a fund formed to invest in private, early-stage,
emerging-growth companies in the information technology and, on limited
occasions, life sciences industries.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Fund is subject to financial market risks, including changes in
interest rates with respect to its investments in debt securities and its
outstanding debt payable, as well as changes in marketable equity security
prices. The Fund does not use derivative financial instruments to mitigate any
of these risks. The return on the Fund's investments is generally not affected
by foreign currency fluctuations.

The Fund's investment in portfolio securities consists of some fixed rate
debt securities. Since the debt securities are generally priced at a fixed rate,
changes in interest rates do not directly impact interest income. In addition,
changes in market interest rates are not typically a significant factor in the
Fund's determination of fair value of these debt securities. The Fund's debt
securities are generally held to maturity and their fair values are determined
on the basis of the terms of the debt security and the financial condition of
the issuer.

The Fund's liabilities consist of debt payable to a financial institution.
The revolving credit facilities are priced at floating rates of interest, with a
basis of LIBOR or prime rate at the Fund's option. As a result of the floating
rate, a change in interest rates could result in either an increase or decrease
in the Fund's interest expense.

A portion of the Fund's investment portfolio consists of debt and equity
investments in private companies. The Fund would anticipate no impact on these
investments from modest changes in public market equity prices. However, should
significant changes in market equity prices occur, there could be a longer-term
effect on valuations of private companies, which could affect the carrying value
and the

30

amount and timing of gains realized on these investments. A portion of the
Fund's investment portfolio also consists of common stocks and warrants to
purchase common stock in publicly traded companies. These investments are
directly exposed to equity price risk, in that a hypothetical ten percent change
in these equity prices would result in a similar percentage change in the fair
value of these securities.


31

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

Report of Independent Public Accountants

To Equus II Incorporated:

We have audited the accompanying balance sheets of Equus II Incorporated
(a Delaware corporation), including the schedules of portfolio securities, as of
December 31, 1999 and 1998, and the related statements of operations, changes in
net assets and cash flows for each of the three years in the period ended
December 31, 1999, and the selected per share data and ratios for each of the
five years in the period ended December 31, 1999. These financial statements and
selected per share data and ratios are the responsibility of the management of
Equus II Incorporated. Our responsibility is to express an opinion on these
financial statements and selected per share data and ratios based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and selected per
share data and ratios are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included physical inspection or
confirmation of securities owned as of December 31, 1999, by correspondence with
the custodian and brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 3, the financial statements include investments in
portfolio securities valued at $111,571,919 (110% of net assets) and
$143,689,403 (124% of net assets) as of December 31, 1999 and 1998,
respectively, whose values have been estimated by Equus Capital Management
Corporation (the "Management Company") and approved by the Board of Directors of
Equus II Incorporated in the absence of readily ascertainable market values. We
have reviewed the procedures used by the Management Company in arriving at their
estimates of value of such securities and have inspected the underlying
documentation, and in the circumstances we believe the procedures are reasonable
and the documentation is appropriate. However, because of the inherent
uncertainty of valuation, the Management Company's estimates of values may
differ significantly from the values that would have been used had a ready
market existed for the securities and the differences could be material.

In our opinion, the financial statements and selected per share data and
ratios referred to above present fairly, in all material respects, the financial
position of Equus II Incorporated as of December 31, 1999 and 1998, the results
of its operations, changes in net assets and cash flows for each of the three
years in the period ended December 31, 1999, and the selected per share data and
ratios for each of the five years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.

/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP

Houston, Texas
February 29, 2000

32

EQUUS II INCORPORATED
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998


1999 1998
------------- -------------

Assets

Investments in portfolio securities at fair value
(cost $116,473,793 and $109,937,121, respectively) ...... $ 115,373,205 $ 154,248,818
Temporary cash investments, at cost which
approximates fair value ................................. 50,334,180 60,214,266
Cash ......................................................... 5,485,502 39,724
Accounts receivable .......................................... 1,050,606 393,235
Accrued interest receivable .................................. 2,778,922 675,851
Commitment fees .............................................. -- 31,250
------------- -------------
Total assets ....................................... 175,022,415 215,603,144
------------- -------------
Liabilities and net assets

Liabilities:
Accounts payable ........................................ 696,501 367,341
Due to management company ............................... 507,094 580,775
Notes payable to bank ................................... 72,400,000 98,500,000
------------- -------------
Total liabilities .................................. 73,603,595 99,448,116
------------- -------------
Commitments and contingencies

Net assets:
Preferred stock, $.001 par value, 5,000,000 shares
authorized, no shares outstanding .................... -- --
Common stock, $.001 par value, 25,000,000 shares
authorized, 6,839,331 and 4,954,304 shares outstanding 6,839 4,954
Additional paid-in capital .............................. 102,676,963 78,407,776
Notes receivable from officers related to 731,662
shares of common stock ................................ (10,132,925) --
Undistributed net investment income ..................... -- --
Undistributed net capital gains (losses) ................ 9,968,531 (6,569,399)
Unrealized appreciation (depreciation) of portfolio
securities, net ....................................... (1,100,588) 44,311,697
------------- -------------
Total net assets ................................... $ 101,418,820 $ 116,155,028
============= =============

The accompanying notes are an
integral part of these financial statements.
33

EQUUS II INCORPORATED
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997


1999 1998 1997
------------ ------------ ------------

Investment income:
Income from portfolio securities .............................. $ 5,060,617 $ 3,726,430 $ 3,926,814
Interest from temporary cash investments ...................... 57,908 48,004 85,861
Interest on notes receivable from officers .................... 38,405 -- --
------------ ------------ ------------
Total investment income ................................... 5,156,930 3,774,434 4,012,675
------------ ------------ ------------
Expenses:
Management fee ................................................ 2,179,413 2,706,325 2,794,795
Interest expense .............................................. 2,163,593 1,970,973 429,940
Non-cash compensation expense ................................. 2,085,766 -- --
Professional fees ............................................. 279,141 490,954 520,161
Director fees and expenses .................................... 269,784 244,899 201,385
Mailing, printing and other expenses .......................... 214,947 383,664 337,531
Franchise taxes ............................................... 91,450 106,278 106,924
Administrative fees ........................................... 50,000 50,000 50,000
Deferred management incentive fee ............................. -- -- 426,501
Management incentive fees ..................................... -- -- 55,825
Amortization .................................................. -- -- 11,730
------------ ------------ ------------
Total expenses ........................................... 7,334,094 5,953,093 4,934,792
------------ ------------ ------------
Net investment loss ................................................ (2,177,164) (2,178,659) (922,117)
------------ ------------ ------------
Realized gain (loss) on sales of
portfolio securities, net ..................................... 40,352,644 (3,563,556) 7,565,699
------------ ------------ ------------
Unrealized appreciation (depreciation) of
portfolio securities, net:

End of year ................................................... (1,100,588) 44,311,697 65,893,353
Beginning of year ............................................. 44,311,697 65,893,353 41,671,464
------------ ------------ ------------
Increase (decrease) in unrealized
appreciation of portfolio securities, net .................. (45,412,285) (21,581,656) 24,221,889
------------ ------------ ------------
Total increase (decrease) in net
assets from operations ..................................... $ (7,236,805) $(27,323,871) $ 30,865,471
============ ============ ============

The accompanying notes are an
integral part of these financial statements.
34

EQUUS II INCORPORATED
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997


1999 1998 1997
------------- ------------- -------------

Operations:

Net investment loss ........................... $ (2,177,164) $ (2,178,659) $ (922,117)
Realized gain (loss) on sales of
portfolio securities, net .................. 40,352,644 (3,563,556) 7,565,699
Increase (decrease) in unrealized
appreciation of portfolio securities, net .. (45,412,285) (21,581,656) 24,221,889
------------- ------------- -------------
Increase (decrease) in net assets
from operations ................................. (7,236,805) (27,323,871) 30,865,471
------------- ------------- -------------
Capital transactions:

Stock issued in payment of deferred
management incentive fee ................... -- -- 11,210,529
Non-cash compensation expense related
to officers' stock options ................. 2,085,766 -- --
Interest on non-recourse portion of
officer notes ............................. 115,217 -- --
Stock repurchase .............................. (1,211,298) -- --
Option loans to officers, net of payments ..... (10,132,925) -- --
Exercise of incentive stock options ........... 11,155,211 -- --
Dividends ..................................... (23,814,714) (3,138,520) (2,380,327)
Shares issued in common stock dividend ........ 14,303,340 2,146,667 1,551,771
------------- ------------- -------------
Increase (decrease) in net assets from
capital share transactions ................. (7,499,403) (991,853) 10,381,973
------------- ------------- -------------
Increase (decrease) in net assets .................. (14,736,208) (28,315,724) 41,247,444

Net assets, at beginning of year ................... 116,155,028 144,470,752 103,223,308
------------- ------------- -------------
Net assets, at end of year ......................... $ 101,418,820 $ 116,155,028 $ 144,470,752
============= ============= =============

The accompanying notes are an
integral part of these financial statements.
35

EQUUS II INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997


1999 1998 1997
------------- ------------- -------------

Cash flows from operating activities:

Interest and dividends received ........................ $ 1,780,944 $ 1,614,656 $ 3,157,683
Cash paid to management company,
directors, bank and suppliers ....................... (5,083,622) (5,913,108) (4,201,393)
------------- ------------- -------------
Net cash used by operating activities ............... (3,302,678) (4,298,452) (1,043,710)
------------- ------------- -------------
Cash flows from investing activities:

Purchase of portfolio securities ....................... (24,908,893) (44,553,395) (32,048,406)
Proceeds from sales of portfolio securities ............ 55,962,420 18,382,928 18,546,690
Principal payments from portfolio securities ........... 4,272,725 1,012,576 5,206,728
Proceeds from exercise of options ...................... 31,125 -- --
Repayments from (advances to) portfolio
companies, net ........................................ 211,640 (250,000) --
------------- ------------- -------------
Net cash provided (used) by investing activities ... 35,569,017 (25,407,891) (8,294,988)
------------- ------------- -------------
Cash flows from financing activities:

Advances from bank ..................................... 225,000,000 341,700,000 354,100,000
Repayments to bank ..................................... (251,100,000) (325,100,000) (337,500,000)
Repurchase of common stock ............................. (1,095,365) -- --
Dividends paid ......................................... (9,505,282) (1,820,409) (1,209,850)
------------- ------------- -------------
Net cash provided (used) by financing activities .... (36,700,647) 14,779,591 15,390,150
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents ........ (4,434,308) (14,926,752) 6,051,452

Cash and cash equivalents at beginning of year .............. 60,253,990 75,180,742 69,129,290
------------- ------------- -------------
Cash and cash equivalents at end of year .................... $ 55,819,682 $ 60,253,990 $ 75,180,742
============= ============= =============

The accompanying notes are an
integral part of these financial statements.
36

EQUUS II INCORPORATED
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
----------------------------------------------------
(Continued)


1999 1998 1997
------------- ------------- -------------

Reconciliation of increase (decrease) in net assets from
operations to net cash used by operating activities:

Increase (decrease) in net assets from operations ........... $ (7,236,805) $ (27,323,871) $ 30,865,471

Adjustments to reconcile increase (decrease) from
operations to net cash used by operating activities:
Realized (gain) loss on sales of portfolio
securities, net ..................................... (40,352,644) 3,563,556 (7,565,699)
Decrease (increase) in unrealized appreciation, net .... 45,412,285 21,581,656 (24,221,889)
Decrease (increase) in accrued interest receivable ..... (2,103,071) (162,228) 383,442
Accrued interest or dividends exchanged for
portfolio securities ................................ (1,388,132) (1,997,550) (1,238,434)
Interest income on non-recourse portion of
officer notes........................................ 115,217 -- --
Non-cash compensation expense .......................... 2,085,766 -- --
Commitment fees paid ................................... -- (37,500) (75,000)
Amortization of commitment fee ......................... 31,250 25,000 73,750
Amortization of deferred reorganization costs .......... -- -- 11,730
Increase (decrease) in accounts payable ................ 207,137 194,064 (34,954)
Stock issued to management company in payment
of deferred management incentive fee ................ -- -- 11,210,529
Decrease in due to management company .................. (73,681) (141,579) (10,452,656)
------------- ------------- -------------
Net cash used by operating activities ....................... $ (3,302,678) $ (4,298,452) $ (1,043,710)
============= ============= =============

The accompanying notes are an
integral part of these financial statements.
37

EQUUS II INCORPORATED
SELECTED PER SHARE DATA AND RATIOS
FOR THE FIVE YEARS ENDED DECEMBER 31,1999


1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------

SELECTED PER SHARE DATA:

Investment income ................................ $ 1.04 $ 0.78 $ 0.85 $ 0.68 $ 1.04

Expenses ......................................... 1.48 1.23 1.04 2.84 1.26
---------- ---------- ---------- ---------- ----------
Net investment loss .............................. (0.44) (0.45) (0.19) (2.16) (0.22)

Realized gain (loss) on sales of
portfolio securities, net ..................... 8.15 (0.74) 1.60 1.06 2.58

Increase (decrease) in unrealized
appreciation of portfolio
securities, net ............................... (9.17) (4.47) 5.11 8.82 (0.43)
---------- ---------- ---------- ---------- ----------
Increase (decrease) in net
assets from operations ........................ (1.46) (5.66) 6.52 7.72 1.93
---------- ---------- ---------- ---------- ----------
Capital transactions:
Dividends ........................................ (4.25) (0.65) (0.50) (0.76) (2.00)
Effect of common stock repurchases ............... 0.10 -- -- -- 0.35
Dilutive effect of shares issued in common
stock dividend and exercise of options ........ (1.23) (0.16) (0.10) (0.20) (0.51)
Effect of Rights Offering ........................ -- -- -- (2.47) --
---------- ---------- ---------- ---------- ----------
Net decrease in assets from
capital transactions .......................... (5.38) (0.81) (0.60) (3.43) (2.16)
---------- ---------- ---------- ---------- ----------
Net increase (decrease) in net assets ............ (6.84) (6.47) 5.92 4.29 (0.23)

Net assets at beginning of year .................. 23.45 29.92 24.00 19.71 19.94
---------- ---------- ---------- ---------- ----------
Net assets at end of year ........................ $ 16.61 $ 23.45 $ 29.92 $ 24.00 $ 19.71
========== ========== ========== ========== ==========
Weighted average number of shares
outstanding during year, in thousands ......... 4,950 4,829 4,733 3,819 2,968

SELECTED RATIOS:

Ratio of expenses before interest and
non-cash compensation expense to
average net assets ............................ 2.84% 3.06% 3.64% 12.45% 5.58%

Ratio of total expenses to average
net assets .................................... 6.74% 4.57% 3.98% 13.15% 6.10%

Ratio of net investment loss to average
net assets .................................. (2.00)% (1.67)% (0.74)% (10.02)% (1.09)%

Ratio of increase (decrease) in net assets
from operations to average net assets ......... (6.65)% (20.97)% 24.92% 35.70% 9.32%

The accompanying notes are an
integral part of these financial statements.
38

EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
DECEMBER 31, 1999


DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---------- ----------

A. C. Liquidating Corporation February 1985
-10% secured promissory notes $ 188,014 $ --

Allied Waste Industries, Inc. (NYSE - AW) March 1989
-900,000 shares of common stock 3,121,565 7,561,125

Champion Window, Inc. March 1999
-1,400,000 shares of common stock 1,400,000 3,500,000
-20,000 shares of preferred stock 2,000,000 2,100,000
-12% subordinated promissory note 3,500,000 3,500,000

Container Acquisition, Inc. February 1997
-1,370,000 shares of common stock 1,370,000 3,870,000
-59,690 shares of preferred stock 5,969,000 5,969,000
-Conditional warrant to buy up to 370,588
shares of common stock at $0.01 per share
through June 2003 1,000 1,000

The Drilltec Corporation August 1998
-1,400,000 shares of common stock 1,400,000 --
-62,450 shares of preferred stock 6,245,000 --
-Prime +9.75% promissory note 524,000 524,000
-Warrant to buy 10% of the common
equity for $100 through September 2002 -- --

Drypers Corporation (NASDAQ - DYPR) July 1991
-3,677,906 shares of common stock 9,328,556 7,078,291

Equicom, Inc. (formerly Texrock Radio, Inc.) July 1997
-452,000 shares of common stock 141,250 --
-657,611 shares of preferred stock 6,576,110 2,000,000
-10% promissory note 1,990,754 1,990,754

Equipment Support Services, Inc. December 1999
-35,000 shares of common stock 101,500 101,500
-35,000 shares of preferred stock 1,929,000 1,929,000
-8% promissory note 1,138,000 1,138,000

The accompanying notes are an
integral part of these financial statements.
39

EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
DECEMBER 31, 1999
(Continued)


DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---------- ----------

GCS RE, Inc. February 1989
-1,000 shares of common stock $ 132,910 $ 300,000

Hot & Cool Holdings, Inc. March 1996
-9% increasing rate subordinated
promissory note 1,075,000 1,075,000
-10% subordinated notes 2,200,000 2,200,000
-12% promissory note 1,500,000 1,500,000
-19,665 shares of Series A 8% preferred stock 786,631 --
-6,000 shares of Series B 8% preferred stock 300,000 --
-5,000 shares of Series C preferred stock 500,000 500,000
-Warrants to buy up to 14,942 shares of common
stock at $0.01 per share through March 2006 -- --
-Warrants to buy up to 16,316 shares of common
stock at $26.00 per share through April, 2007 -- --
-Warrant to buy 10,000 shares of common stock
at $0.01 through February 28, 2003 -- --

LG&E Energy Corp. (NYSE-LGE) July 1999
-121,504 shares of common stock 1,719,838 1,800,917
-Earnout and escrow receivable 3,754,199 6,800,000

NCI Building Systems, Inc. (NYSE-NCS) April 1989
-200,000 shares of common stock 159,784 3,700,000

Paracelsus Healthcare Corporation (NYSE - PLS) December 1990
-2,018,213 shares of common stock 5,278,748 788,372

Petrocon Engineering, Inc. September 1998
-12% promissory note 4,663,356 4,663,356
-887,338 shares of common stock 635 635
-8% Series B junior subordinated promissory note 2,659,332 2,659,332
-Warrant to buy up to 1,552,571 shares of common
stock at $0.01 per share through March 2009 -- --

The accompanying notes are an
integral part of these financial statements.
40

EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
DECEMBER 31, 1999
(Continued)


DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---------- ----------

Raytel Medical Corporation (NASDAQ - RTEL) August 1997
-33,073 shares of common stock $ 330,730 $ 101,286

The ServiceMaster Company (NYSE-SVM) May 1999
-Warrant to buy up to 29,411 shares of common
stock at $51 per share through September 2001 -- --

Sovereign Business Forms, Inc. August 1996
-14,648 shares of preferred stock 1,464,800 1,464,800
-15% promissory notes 2,300,000 2,300,000
-Warrant to buy 551,894 shares of common
stock at $1 per share through August 2006 -- 413,920
-Warrant to buy 25,070 shares of common stock
at $1.25 per share through October 2007 -- 12,535
-Warrant to buy 273,450 shares of common
stock at $1 per share through October 2009 -- 205,088

Spectrum Management, LLC December 1999
-285,000 Units of Class A equity interest 2,850,000 2,850,000

Stephen L. LaFrance Holdings, Inc. September 1997
-2,498,452 shares of preferred stock 2,498,452 2,498,452
-Warrant to buy 269 shares of common stock
for $0.01 per share through September 2007 -- 3,000,000

Strategic Holdings, Inc. September 1995
-3,089,751 shares of common stock 3,088,389 2,568,287
-3,822,157 shares of Series B preferred stock 3,820,624 3,820,624
-15% promissory note 6,750,000 6,750,000
-Warrants to buy 225,000 shares of common
stock at $0.4643 per share through August 2005 -- 187,026
-Warrant to buy 100,000 shares of common stock
at $1.50 per share through August 2005 -- --
-Warrant to buy 2,219,237 shares of common
stock at $0.01 per share through November 2005 -- 1,844,687
-1,000 shares of SMIP, Inc. common stock 150,000 150,000
-15% promissory note of SMIP, Inc. 175,000 175,000

The accompanying notes are an
integral part of these financial statements.
41

EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
DECEMBER 31, 1999
(Continued)


DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ------------ ------------

Summit/DPC Partners, L.P. October 1995
-36.11% limited partnership interest $ 2,600,000 $ 5,500,000

Travis International, Inc. December 1986
-98,761 shares of common stock 5,398 1,000,000

Tulsa Industries, Inc. December 1997
-27,500 shares of common stock 33,846 --
-181,589 shares of Series A preferred stock 5,466,154 --
-1,058 shares of Series B preferred stock 1,058,000 1,058,000
-Junior participation in promissory note 655,769 655,769

Turfgrass America, Inc. May 1999
-3,167,756 shares of common stock 600,000 600,000
-12% subordinated promissory note 3,475,000 3,475,000

United Industrial Services, Inc. July 1998
-35,000 shares of preferred stock 3,500,000 3,500,000
-Warrants to buy 63,637 shares of common
stock at $0.01 through June 2008 100 100

VRPI Spin Off, Inc. January 1988
-100 shares of common stock 250,000 250,000
-10% secured promissory note 2,672,349 2,672,349
-12% secured promissory note 1,050,000 1,050,000
-10,000 shares of common stock of
Equus Video Corporation 25,000 20,000
------------ ------------
Total $116,473,793 $115,373,205
============ ============


The accompanying notes are an
integral part of these financial statements.
42

EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
DECEMBER 31, 1999
(Continued)

Substantially all of the Fund's portfolio securities are restricted from
public sale without prior registration under the Securities Act of 1933. The
Fund negotiates certain aspects of the method and timing of the disposition of
the Fund's investment in each portfolio company, including registration rights
and related costs.

In connection with the investments in Allied Waste Industries, Inc.,
Champion Window, Inc., Container Acquisition, Inc., The Drilltec Corporation,
Drypers Corporation, Hot & Cool Holdings, Inc., Sovereign Business Forms, Inc.,
Strategic Holdings, Inc., Turfgrass America, Inc. and United Industrial
Services, Inc. rights have been obtained to demand the registration of such
securities under the Securities Act of 1933, providing certain conditions are
met. The Fund does not expect to incur significant costs, including costs of any
such registration, in connection with the future disposition of its portfolio
securities.

As defined in the Investment Company Act of 1940, during the year ended
December 31, 1999, the Fund was considered to have a controlling interest in
Champion Window, Inc., Container Acquisition, Inc., The Drilltec Corporation,
Drypers Corporation, Equicom, Inc., Sovereign Business Forms, Inc., Spectrum
Management LLC, Strategic Holdings, Inc., Tulsa Industries, Inc., United
Industrial Services, Inc. and VRPI Spin Off, Inc. The fair values of the Fund's
investments in publicly traded securities include discounts from the closing
market prices to reflect the estimated effects of restrictions on the sale of
such securities at December 31, 1999. Such discounts, shown in the following
table, total $2,554,017 or $0.42 per share as of December 31, 1999.

Discount from
Market Value
-------------
Allied Waste Industries, Inc........... $ 370,125
Drypers Corporation.................... 1,771,486
LG&E Energy Corp....................... 317,809
Paracelsus Healthcare Corporation...... 94,597
-------------
Total discount................... $ 2,554,017
=============

Income was earned in the amount of $2,251,120, $2,542,677 and $2,102,520
for the years December 31, 1999, 1998 and 1997 respectively, on portfolio
securities of companies in which the Fund has a controlling interest.

As defined in the Investment Company Act of 1940, all of the Fund's
investments are in eligible portfolio companies. The Fund provides significant
managerial assistance to all of the portfolio companies in which it has
invested, except Equipment Support Services, Inc., LG&E Energy Corp., Raytel
Medical Corporation and Summit/DPC Partners, L.P. The Fund provides significant
managerial assistance to portfolio companies that comprise 85% of the total
value of the investments in portfolio companies at December 31, 1999.

The accompanying notes are an
integral part of these financial statements.
43

EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
DECEMBER 31, 1998


DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---------- ------------

A. C. Liquidating Corporation February 1985
-10% secured promissory notes $ 188,014 $ --

Allied Waste Industries, Inc. (NYSE - AW) March 1989
-875,000 shares of common stock 2,970,721 20,051,719
-Warrants to buy up to 125,000 shares of common
stock at $5 per share through August 1999 -- 1,575,078

American Residential Services, Inc. (NYSE - ARS) December 1995
-1,125,000 shares of common stock 3,000,272 3,223,175
-Warrants to buy up to 100,000 shares of common
stock at $15 per share through September 2001 -- --

Atlas Acquisition, Inc. May 1997
-Junior participation in prime + 1.5% note 850,000 250,000

Carruth-Doggett Industries, Inc. December 1995
-10% senior subordinated promissory note 2,250,000 2,250,000
-Warrant to buy up to 33,333 shares of common
stock at $0.01 per share through December 2005 -- 2,250,000
-Warrant to buy up to 249 shares of common
stock of CDE Corp. at $0.01 per share through
December 2005 -- --

Container Acquisition, Inc. February 1997
-1,370,000 shares of common stock 1,370,000 1,370,000
-54,078 shares of preferred stock 5,407,800 5,407,800
-Warrant to buy up to 370,588 shares of common
stock at $0.01 per share through June 2003 1,000 1,000

CRC Holdings, Corp. June 1997
-59,891 shares of common stock 5,474,037 20,961,850
-12% subordinated promissory note 959,700 959,700

The Drilltec Corporation August 1998
-1,400,000 shares of common stock 1,400,000 --
-62,450 shares of preferred stock 6,245,000 --

The accompanying notes are an
integral part of these financial statements.
44

EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
DECEMBER 31, 1998
(Continued)


DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---------- ------------

Drypers Corporation (NASDAQ - DYPR) July 1991
-3,677,906 shares of common stock $9,328,556 $ 9,646,838

Equicom, Inc. (formerly Texrock Radio, Inc.) July 1997
-500,000 shares of common stock 156,250 156,250
-543,230 shares of preferred stock 5,432,300 5,432,300
-10% promissory note 2,682,000 2,682,000

Garden Ridge Corporation (NASDAQ - GRDG) July 1992
-474,942 shares of common stock 685,030 4,175,267

GCS RE, Inc. February 1989
-1,000 shares of common stock 132,910 300,000

Hot & Cool Holdings, Inc. March 1996
-9% increasing rate subordinated
promissory note 1,120,000 1,120,000
-10% subordinated notes 2,200,000 2,200,000
-12% senior unsecured promissory note 1,000,000 1,000,000
-12,147 shares of Series A 8% preferred stock 485,897 485,897
-Warrants to buy up to 14,942 shares of common
stock at $0.01 per share through March 2006 -- 280,000
-Warrants to buy up to 16,316 shares of common
stock at $26.00 per share through April, 2007 -- --

HTD Corporation (formerly Triad Medical Inc.) April 1997
-1,251,944 shares of common stock 8,165,000 10,015,552
-0% promissory note 1,337,530 1,337,530

NCI Building Systems, Inc. (NYSE - NCS) April 1989
-200,000 shares of common stock 159,784 5,625,000

OEI International, Inc. October 1997
-566,201 shares of common stock 635 635
-Prime + 1/2% promissory note 2,500,000 2,500,000

Paracelsus Healthcare Corporation (NYSE - PLS) December 1990
-1,263,058 shares of common stock 5,278,748 1,833,106

The accompanying notes are an
integral part of these financial statements.
45

EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
DECEMBER 31, 1998
-----------------
(Continued)


DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ---------- ------------

Petrocon Engineering, Inc. September 1998
-15% promissory note $2,500,000 $ 2,500,000

Raytel Medical Corporation (NASDAQ - RTEL) August 1997
-33,073 shares of common stock 330,730 153,988

Sovereign Business Forms, Inc. August 1996
-13,400 shares of preferred stock 1,340,000 1,340,000
-15% promissory notes 800,000 800,000
-Warrant to buy 551,894 shares of common
stock at $1 per share through August 2006 -- 1,440,818
-Warrant to buy 25,070 shares of common stock
at $1.25 per share through October 2007 -- 59,182

Stephen L. LaFrance Holdings, Inc. September 1997
-2,498,452 shares of preferred stock 2,498,452 2,498,452
-Warrant to buy 269 shares of common stock
for $0.01 per share through September 2007 -- 1,000,000

Strategic Holdings, Inc. September 1995
-3,089,751 shares of common stock 3,088,389 1,795,035
-3,822,157 shares of Series B preferred stock 3,820,624 3,820,624
-15% promissory note 6,750,000 6,750,000
-Warrants to buy 225,000 shares of common
stock at $0.4643 per share through August 2005 -- 26,249
-Warrant to buy 100,000 shares of common stock
at $1.50 per share through August 2005 -- --
-Warrant to buy 2,219,237 shares of common
stock at $0.01 per share through November 2005 -- 1,267,105
-1,000 shares of SMIP, Inc. common stock 150,000 150,000
-15% promissory note of SMIP, Inc. 175,000 175,000

Summit/DPC Partners, L.P. October 1995
-36.11% limited partnership interest 2,600,000 4,600,000

The accompanying notes are an
integral part of these financial statements.
46

EQUUS II INCORPORATED
SCHEDULE OF PORTFOLIO SECURITIES
DECEMBER 31, 1998
-----------------
(Continued)


DATE OF
PORTFOLIO COMPANY INITIAL INVESTMENT COST FAIR VALUE
----------------- ------------------ ------------ ------------

Travis International, Inc. December 1986
-66,784 shares of common stock $ 534,589 $ 2,537,792
-104,500 shares of Class A common stock 25,701 3,971,000

Tulsa Industries, Inc. December 1997
-27,500 shares of common stock 33,846 --
-546,615 shares of Series A preferred stock 5,466,154 --
-Warrants to buy 31,731 shares of common
stock at $0.001 per share -- --

United Industrial Services, Inc. July 1998
-35,000 shares of preferred stock 3,500,000 3,500,000
-Warrants to buy 63,637 shares of common
stock at $0.01 through June 2008 100 100

United Rentals, Inc. (NYSE - URI) October 1997
-54,334 shares of common stock 397 1,799,814

United States Filter Corporation (NYSE - USF) October 1989
-130,300 shares of common stock 1,544,606 2,980,613

VRPI Spin Off, Inc. January 1988
-100 shares of common stock 250,000 250,000
-10% secured promissory note 2,672,349 2,672,349
-12% secured promissory note 1,050,000 1,050,000
-10,000 shares of common stock of
Equus Video Corporation 25,000 20,000
------------ ------------
Total $109,937,121 $154,248,818
============ ============

The accompanying notes are an
integral part of these financial statements.
47

EQUUS II INCORPORATED
NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 1999, 1998 AND 1997

(1) ORGANIZATION AND BUSINESS PURPOSE

Equus II Incorporated (the "Fund"), a Delaware corporation with perpetual
existence, was formed by Equus Investments II, L.P. (the "Partnership") on
August 16, 1991. On July 1, 1992, the Partnership was reorganized and all of the
assets and liabilities of the Partnership were transferred to the Fund in
exchange for shares of common stock of the Fund. The shares of the Fund trade on
the New York Stock Exchange under the symbol EQS.

The Fund seeks to achieve capital appreciation by making investments in
equity and equity-oriented securities issued by privately-owned companies in
transactions negotiated directly with such companies. The Fund seeks to invest
primarily in companies which intend to acquire other businesses, including
leveraged buyouts. The Fund may also invest in recapitalizations of existing
businesses or special situations from time to time. The Fund's investments in
Portfolio Companies consist principally of equity securities such as common and
preferred stock, but also include other equity-oriented securities such as debt
convertible into common or preferred stock or debt combined with warrants,
options or other rights to acquire common or preferred stock. Current income is
not a significant factor in the selection of investments. The Fund elected to be
treated as a business development company under the Investment Company Act of
1940, as amended.

(2) MANAGEMENT

The Fund has entered into a management agreement with Equus Capital
Management Corporation, a Delaware corporation (the "Management Company").
Pursuant to such agreement, the Management Company performs certain services,
including certain management and administrative services necessary for the
operation of the Fund. The Management Company receives a management fee at an
annual rate of 2% of the net assets of the Fund, paid quarterly in arrears. The
Management Company also receives compensation for providing certain investor
communication services, of which $50,000 is included in the accompanying
Statements of Operations for each of the three years ended December 31, 1999.

Through March 31, 1997, the Management Company also received a management
incentive fee equal to 20% of net realized capital gains less unrealized capital
depreciation, computed on a cumulative basis over the life of the Fund. The
management incentive fee was paid quarterly in arrears. Pursuant to the vote of
the stockholders at a special meeting held on April 9, 1997 ("Special Meeting"),
the Fund entered into a new management agreement with the Management Company.
The only significant change from the previous management agreement was the
elimination of incentive fees based on capital gains effective as of April 1,
1997. As a result, the Fund did not incur a management incentive fee for the
years ended December 31, 1999 and 1998. Management incentive fees of $55,825
were included in the accompanying Statements of Operations for the year ended
December 31, 1997.

Pursuant to the vote of the stockholders at the Special Meeting, the
deferred incentive fee, which was calculated on the net unrealized appreciation
of investments in portfolio securities and which amounted to $11,210,529 at
March 31, 1997, was paid on May 15, 1997, by the issuance to the Management
Company of 459,973 unregistered shares of common stock of the Fund. The number
of shares issued was determined by dividing the deferred incentive fee by $24.37
per share, the net asset value per share at March 31, 1997. Deferred management
incentive fee expense of $426,501, resulting

48

from increases in net unrealized appreciation on portfolio securities, has been
included in the accompanying Statements of Operations for the year ended
December 31, 1997.

The Management Company is controlled by a privately-owned corporation.

As compensation for services rendered to the Fund, each director who is
not an officer of the Fund receives an annual fee of $25,000 paid quarterly in
arrears, a fee of $3,000 for each meeting of the Board of Directors attended in
person, a fee of $1,500 for participation in each telephonic meeting of the
Board of Directors and for each committee meeting attended ($500 for each
committee meeting if attended on the same day as a Board Meeting), and
reimbursement of all out-of-pocket expenses relating to attendance at such
meetings. In addition, each director who is not an officer of the Fund is
granted incentive stock options to purchase shares of the Fund's stock from time
to time. (See Note 10). Certain officers and directors of the Fund serve as
directors of Portfolio Companies, and may receive and retain fees, including
non-employee director stock options, from such Portfolio Companies in
consideration for such service.

(3) SIGNIFICANT ACCOUNTING POLICIES

Valuation of Investments - Portfolio investments are carried at fair value
with the net change in unrealized appreciation or depreciation included in the
determination of net assets. Investments in companies whose securities are
publicly traded are valued at their quoted market price, less a discount to
reflect the estimated effects of restrictions on the sale of such securities
("Valuation Discount"), if applicable. Cost is used to approximate fair value of
other investments until significant developments affecting an investment provide
a basis for use of an appraisal valuation. Thereafter, portfolio investments are
carried at appraised values as determined quarterly by the Management Company,
subject to the approval of the Board of Directors. The fair market values of
debt securities, which are generally held to maturity, are determined on the
basis of the terms of the debt securities and the financial conditions of the
issuer. Because of the inherent uncertainty of the valuation of portfolio
securities which do not have readily ascertainable market values, amounting to
$111,571,919 (including $17,228,705 in publicly-traded securities, net of a
$2,554,017 Valuation Discount) and $143,689,403 (including $40,505,183 in
publicly-traded securities, net of a $4,382,822 Valuation Discount) at December
31, 1999 and 1998, respectively, the Fund's estimate of fair value may
significantly differ from the fair value that would have been used had a ready
market existed for the securities. Appraised values do not reflect brokers' fees
or other normal selling costs or management incentive fees which might become
payable on disposition of such investments.

On a daily basis, the Fund adjusts its net asset value for the changes in
the value of its publicly held securities and material changes in the value of
its private securities and reports those amounts to Lipper Analytical Services,
Inc. Weekly and daily net asset values appear in various publications, including
BARRON'S and THE WALL STREET JOURNAL and the Fund's website, www.equuscap.com.

Investment Transactions - Investment transactions are recorded on the
accrual method. Realized gains and losses on investments sold are computed on a
specific identification basis.

Cash Flows - For purposes of the Statements of Cash Flows, the Fund
considers all highly liquid temporary cash investments purchased with an
original maturity of three months or less to be cash equivalents.

Income Taxes - No provision for federal income taxes has been made in the
accompanying financial statements as the Fund has qualified for pass-through
treatment as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986. As such, all net income is

49

allocable to the stockholders for inclusion in their respective tax returns. Net
capital losses are not allocable to the shareholders but can be carried over to
offset future earnings of the Fund.

(4) BOOK TO TAX RECONCILIATION

The Fund accounts for dividends in accordance with Statement of Position
93-2 which relates to the amounts distributed by the Fund as net investment
income or net capital gains, which are often not equal to the corresponding
income or gains shown in the Fund's financial statements. The Internal Revenue
Service approved the Fund's request, effective October 31, 1998, to change its
year-end for determining capital gains for federal income tax from December 31
to October 31, which allows current year dividends to be paid prior to the end
of the year.

For the year ended December 31, 1999, the Fund had a net investment loss
for book purposes of $2,177,164 and net investment income of $108,174 for tax
purposes. The difference between book and tax was primarily non-cash
compensation expense recorded on the books related to dividends paid on shares
owned by officers which secure limited recourse notes receivable by the Fund.
For tax purposes, the Fund distributed net capital gains of $23,814,714 for the
twelve months ended October 31, 1999. For the period from November 1, 1999 to
December 31, 1999, the Fund had undistributed capital gains of $9,946,780.
Therefore, the Fund for book purposes, had net capital gains of $40,352,644 as
of December 31, 1999.

For the year ended December 31, 1998, the Fund had a net investment loss
for tax purposes and did not distribute investment income. On November 4, 1998,
the Fund declared undistributed net capital gains for the ten months ended
October 31, 1998 of $2,995,079 as a dividend. In addition, on July 1, 1998, the
Fund declared undistributed capital gains for 1997 of $132,677 as a dividend.
For the period from November 1, 1998 to December 31, 1998, the Fund had
undistributed net capital losses of $6,558,635. For book purposes, the Fund had
net capital losses of $3,563,556 as of December 31, 1998.

The following is a reconciliation of the difference in the Fund's net
realized gain or loss on the sale of portfolio securities for book and tax
purposes:


1999 1998 1997
------------ ------------ ------------

Net realized gain (loss) on the sales
of portfolio securities, book ...... $ 40,352,644 $ (3,563,556) $ 7,565,699
Management incentive fee ............. -- -- (7,530,386)
Undistributed 1997 gains ............. -- 132,677 --
Realized capital loss 11/1/98 -
12/31/98 ......................... (6,558,635) 6,558,635 --
Realized capital gains 11/1/99 -
12/31/99 ......................... (9,946,780) -- --
------------ ------------ ------------
Net realized gain on the
sales of portfolio securities, tax $ 23,847,229 $ 3,127,756 $ 35,313
============ ============ ============

(5) DIVIDENDS

The Fund declared dividends of $23,814,714 ($4.25 per share), $3,138,520
($0.65 per share) and 2,380,327 ($0.50 per share) during 1999, 1998 and 1997,
respectively. The Fund has adopted a policy to

50

make dividend distributions of at least $0.50 per share on an annual basis. In
the event that taxable income, including realized capital gains, exceeds $0.50
per share in any year, additional dividends may be declared to distribute such
excess. The 1999 and 1998 dividend were paid in additional shares of common
stock or in cash by specific election of the shareholders in December 1999 and
1998, and represented long-term capital gains. The 1997 dividend, which
represented the Fund's net investment income and net capital gains for tax
purposes, was paid in additional shares of common stock or in cash by specific
election of the shareholders in January 1998. The Fund paid $9,511,374, $991,853
and $828,556 in cash and issued 1,337,542, 125,812 and 67,837 additional shares
of stock at $10.69375, $17.0625 and $22.875 per share, in December 1999 and 1998
and January 1998, respectively, in connection with such dividends. The stock
issued in January 1998 is reflected as outstanding as of December 31, 1997 in
the accompanying financial statements.

(6) TEMPORARY CASH INVESTMENTS

Temporary cash investments, which represent the short-term utilization of
cash prior to investment in securities of portfolio companies, distributions to
the shareholders or payment of expenses, consist of $50,334,180 and $60,214,266
in money market accounts with NationsBank, N.A. earning interest at rates
ranging from 4.64% to 5.21% and 3.50% to 5.30% at December 31, 1999 and 1998,
respectively.

(7) ACCOUNTS RECEIVABLE

At December 31, 1999, the accounts receivable balance was $1,050,606, and
primarily consisted of $991,161 in principal due on the notes receivable from
officers that were issued to the Fund when the officers exercised some of their
stock options. The $991,161 was received in January 2000. In addition, $38,818
was included in receivables due from two portfolio companies as reimbursement
for expenses related to such investments.

(8) PORTFOLIO SECURITIES

During the year ended December 31, 1999, the Fund invested $20,638,398 in
six new companies and made follow-on investments of $10,591,965 in eleven
companies, including $1,388,132 in accrued interest and dividends received in
the form of additional portfolio securities and accretion of original issue
discount on a promissory note. The Fund also received note payments and proceeds
from the sale of portfolio securities of $4,933,338 in the form of additional
portfolio securities. In addition, the Fund realized a net capital gain of
$40,352,644 during the year ended December 31, 1999.

During the year ended December 31, 1998, the Fund invested $13,645,100 in
three new companies and made follow-on investments of $33,087,284 in eleven
portfolio companies, including $1,998,989 in accrued interest and dividends
received in the form of additional portfolio securities and accretion of
original issue discount on a promissory note. In addition, the Fund realized a
net capital loss of $3,563,556 during the year ended December 31, 1998.

During the year ended December 31, 1997, the Fund invested $27,644,902 in
eleven new companies and made follow-on investments of $5,952,669 in eight
portfolio companies, including $1,238,434 in accrued interest and dividends
received in the form of additional portfolio securities and $330,730 in
securities received upon the sale of securities of another portfolio company. In
addition, the Fund realized a net capital gain of $7,565,699 during the year
ended December 31, 1997.

51

(9) NOTES PAYABLE TO BANK

The Fund has a $100,000,000 line of credit promissory note with Bank of
America N.A., with interest payable at 1/2% over the rate earned in its money
market account at December 31, 1999. The Fund had a $150,000,000 line of credit
promissory note with Bank of America, N.A., with interest payable at 1% over the
rate earned in its money market at December 31, 1998. The Fund had $50,000,000
and $60,000,000 outstanding on such notes, at December 31, 1999 and 1998,
respectively, that was secured by $50,000,000 and $60,000,000 of the Fund's
temporary cash investments. The Fund paid $37,500 in commitment fees in 1998,
which were capitalized and amortized over the commitment period. Effective June
1, 1999, the Fund extended the line of credit promissory note to June 1, 2000.

The Fund has a $40,000,000 revolving line of credit with Bank of America,
N.A. that expires on June 1, 2000. The Fund had $22,400,000 and $38,500,000
outstanding under such line of credit at December 31, 1999 and 1998,
respectively, which is secured by the Fund's investments in portfolio
securities. The interest rate ranges from prime -1/2% to prime +1/4% or LIBOR +
1.65%. The Fund also pays interest at the rate of 1/4% per annum on the unused
portion of the line of credit.

The average daily balances outstanding on the Fund's notes payable during
the years ended December 31, 1999 and 1998, were $26,855,068 and $23,469,957,
respectively.

(10) STOCK OPTION PLAN

Shareholders have approved the Equus II Incorporated 1997 Stock Incentive
Plan ("Stock Incentive Plan"), which authorizes the Fund to issue options to the
directors and officers of the Fund in an aggregate amount of up to 20% of the
outstanding shares of common stock of the Fund. Implementation of this plan was
subject to the receipt of an exemptive order from the Securities and Exchange
Commission ("SEC"), which was received on May 8, 1997.

The Stock Incentive Plan also provides that each director who is not an
officer of the Fund is, on the first business day following each annual meeting,
granted an incentive stock option to purchase 2,000 shares of the Fund's common
stock. On May 7, 1999, options to acquire a total of 12,000 shares at $15.56 per
share were issued to the directors. During 1999, two directors each exercised
1,000 of their options to acquire a total of 2,000 shares for $15.5625 per
share.

Under the Stock Incentive Plan, options to purchase 294,773 and 939,131
shares of the Fund's common stock with a weighted average exercise price of
$19.07 and $17.66 per share were outstanding at December 31, 1999 and 1998,
respectively. The Fund had 91,150 and 671,849 shares in exercisable options with
a weighted average exercise price per share of $22.33 and $17.58 at December 31,
1999 and 1998, respectively. Outstanding options at December 31, 1999 have
exercise prices ranging from $15.56 to $27.44 and expire in May 2007 through May
2009. On September 30, 1999, options to purchase 654,358 shares of common stock
of the Fund were exercised by the officers of the Fund for $17 per share. The
exercise price of $11,124,086 was paid in the form of promissory notes from the
officers to the Fund. The notes bear interest at 5.42% per annum, have limited
recourse and are due on or before September 30, 2008. The notes are secured by
the 654,358 shares, including any proceeds or dividends paid thereon. During
1999, a dividend of $4.25 per share was paid by the Fund. As a result of this
dividend, 135,608 additional shares were issued to the officers and pledged to
the Fund. In addition, principal payments of $991,161, representing 58,304
shares, were made on the notes. As a result of the additional shares issued and
payments made, the notes are secured by 789,966 shares of common stock and the
outstanding note balance is $10,132,925.

The notes receivable, as well as 731,662 of such shares of pledged common
stock, are not

52

included in the Fund's net asset value per share. The shares of stock financed
by the notes from the officers will be included in the net asset value per share
as the shares are paid for or released from collateral. Shares may be released
as payments on the notes are made or as the value of the collateral increases.
Generally accepted accounting principles require that the options issued to the
officers be accounted for using variable plan accounting due to the limited
recourse provision of such notes. Additionally, the dividends paid on the
non-recourse portion of the notes are required to be recorded as compensation
expense in the statements of operations, and interest recorded on the
non-recourse portion of the notes is required to be recorded as an increase to
additional paid-in capital. Accordingly, for the year ended December 31, 1999,
dividends of $2,085,766 were recorded as non-cash compensation expense and
interest of $115,217 was credited to additional paid-in capital. Additionally,
the limited recourse note receivable from the officers is required to be
recorded as a reduction of net assets. If the notes and the shares were included
in the Fund's balance sheet, the net asset value would have been $16.31 per
share at December 31, 1999.

As of December 31, 1999 and 1998, all outstanding options were "out of the
money" and would not have had a dilutive effect on net assets per share if
exercised, assuming the Fund would use the proceeds from the exercise of such
options to purchase shares at the market price pursuant to the treasury stock
method.

In accordance with the terms of Accounting Principles Board Opinion No. 25
Accounting for Stock Issued to Employees ("APB 25"), because the exercise price
of the Fund's Incentive Options equals the market price of the underlying stock
on the date of grant, the Fund records no compensation expense for its stock
option awards. As required by the Financial Accounting Standards Board Statement
No. 123, Accounting for Stock-based Compensation ("SFAS 123"), the Fund provides
the following disclosure of hypothetical values for these awards. The weighted
average grant-date fair value of options granted during 1999, 1998 and 1997 was
$1.80, $6.39 and $3.86 per share, respectively. These values for 1999, 1998 and
1997 were estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions: expected dividend of 8.3%, 4.9% and
5.1%, expected volatility of 27.6%, 28.8% and 25.3% and risk free interest rates
of 6.0%, 5.8% and 6.4%, respectively. An expected life of 10 years was used for
1999, 1998 and 1997. Had compensation expense been recorded based on these
hypothetical values, the Fund's 1999, 1998 and 1997 change in net assets from
operations would have been reduced by $1,146,718, $1,135,967 and $712,734,
respectively. Because options vest over several years and additional grants are
expected, the effects of these hypothetical calculations are not likely to be
representative of similar future calculations.

(11) COMMITMENTS AND CONTINGENCIES

The Fund has made commitments to invest, under certain circumstances, up
to an additional $476,000 in The Drilltec Corporation, $147,766 in Equicom, Inc.
and $500,000 in Hot & Cool Holdings, Inc.

The Fund and certain of the portfolio companies are involved in asserted
claims and have the possibility for unasserted claims which may ultimately
affect the fair value of the Fund's portfolio investments. In the opinion of
Management, the financial position or operating results of the Fund will not be
materially affected by these claims.

On October 1, 1999, the Fund announced it would purchase up to 300,000
shares of its common stock in open market transactions over the next six months,
subject to market conditions and limitations. As of December 31, 1999, the Fund
had repurchased 108,873 shares of common stock for $1,211,298, $115,932 of which
is included in accounts payable at December 31, 1999. The stock repurchased in
1999 was repurchased at an average discount of 32.3% from its net asset value.

53

(12) SUBSEQUENT EVENTS

Subsequent to December 31, 1999, the Fund repaid a net $55,100,000 of
notes payable to the bank.

From January through February 29, 2000, the Fund repurchased an additional
94,631 shares of common stock for $959,060.

Subsequent to December 31, 1999, the Fund advanced an additional $160,000
to The Drilltec Corporation on a prime +9.75% promissory note and $147,746 to
Equicom, Inc. on a 10% promissory note.

In February 2000, the Fund realized a capital gain as a result of the
receipt of $654,570 in additional compensation from the escrow account related
to the 1998 sale of WMW Industries.

In February 2000, the Fund advanced an additional $500,000 to Hot & Cool
Holdings, Inc. under a 12% promissory note.

On February 28, 2000, the Fund purchased 80,951 shares of common stock of
Doane Pet Care Enterprises, Inc. ("Doane") for $726,565 from a current
shareholder of Doane. The Fund indirectly owns 1,039,968 shares of Doane common
stock through its ownership of Summit/DPC Partners. The shares of Doane were
purchased subject to the existing Doane shareholders' right of first refusal
after an independent third party offered to buy the shares from the current
shareholder. The Fund's investment in Summit/DPC was valued at $5,500,000 at
December 31, 1999. The fair value of the Fund's investment, using the price paid
in this transaction, will be raised to $9,300,000 effective March 1, 2000.

In February 2000, the Fund committed to invest up to $3,000,000 in
Sternhill Partners I, L.P., a fund formed to invest in private, early-stage,
emerging-growth companies in the information technology and, on limited
occasions, life sciences industries.

54

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information about the Directors and Executive Officers of the Registrant
is incorporated by reference to the Fund's Definitive Proxy Statement for the
1999 Annual Meeting of Stockholders, to be filed pursuant to Regulation 14A
under the Securities and Exchange Act of 1934, as amended, prior to April 30,
2000 (the "2000 Proxy Statement").

ITEM 11. EXECUTIVE COMPENSATION.

Information regarding Executive Compensation is incorporated by reference
to the Fund's 2000 Proxy Statement.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated by reference to the Fund's 2000 Proxy Statement.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information regarding Certain Relationships and Related Transactions is
incorporated by reference to the Fund's 2000 Proxy Statement.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)(1) FINANCIAL STATEMENTS PAGE
-------------------- ----
Report of Independent Public Accountants 32

Balance Sheets
December 31, 1999 and 1998 33

Statements of Operations for the years
ended December 31, 1999, 1998 and 1997 34

Statements of Changes in Net Assets for the
years ended December 31, 1999, 1998 and 1997 35

Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997 36

Selected Per Share Data and Ratios for the
five years ended December 31, 1999 38

Schedule of Portfolio Securities
December 31, 1999 39

55

Schedule of Portfolio Securities
December 31, 1998 44

Notes to Financial Statements 48

All other information required in the financial statement schedules has
been incorporated in the financial statements or notes thereto or has been
omitted since the information is not applicable, not present or not present in
amounts sufficient to require submission of the schedule.

(a)(3) EXHIBITS

3. Articles of Incorporation and by-laws

(a) Restated Certificate of Incorporation of the Fund dated March 4,
1992. [Incorporated by reference to Exhibit 3(a) to Registrant's
Annual Report on Form 10-K for the year ended December 31, 1991]

(b) Certificate of Merger dated June 30, 1993, between the Fund and
Equus Investments Incorporated [Incorporated by reference to
Exhibit 3(c) to Registrant's Annual Report on Form 10-K for the
year ended December 31, 1993]

(c) Amended and Restated Bylaws of the Fund. [Incorporated by
reference to Exhibit 3(c) to Registrant's Annual Report on Form
10-K for the year ended December 31, 1995]

10. Material Contracts

(a) Form of Management Agreement between the Fund and Equus Capital
Management Corporation. [Incorporated by reference to Exhibit A to
the Definitive Proxy Statement dated February 24, 1997]

(b) 1997 Stock Incentive Plan [Incorporated by reference to Exhibit B
to the Registrant's Definitive Proxy Statement dated February 24,
1997]

(c) Amended and Restated Loan Agreement by and between Equus II
Incorporated and NationsBank of Texas, N.A., dated March 29, 1996
[Incorporated by reference to Exhibit 10(g) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.]

(d) Second Amendment and Restated Loan Agreement by and between Equus
II Incorporated and Nations Bank, N.A., d/b/a Bank of America,
N.A. dated June 1,1999. [Incorporated by reference to Exhibit 10
to Registrant's Quarterly Report on form 10-Q for the quarter
ended June 30, 1999.]

(e) Form of promissory note and security agreement-pledge dated
September 30, 1999. [Incorporated by reference to Exhibit 10 to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1999.]

(b) REPORTS ON FORM 8-K

56

No reports on Form 8-K were filed by the Fund during the last
quarter of the period covered by this report.

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has caused this report to be signed by the
undersigned, thereunto duly authorized.

EQUUS II INCORPORATED


/s/ NOLAN LEHMANN
------------------------
Date: March 2, 2000 Nolan Lehmann, President



Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


SIGNATURE TITLE DATE
--------- ----- ----



/s/ GREGORY J. FLANAGAN Director March 2, 2000
- -----------------------
(Gregory J. Flanagan)

/s/ ROBERT L. KNAUSS Director March 2, 2000
- -----------------------
(Robert L. Knauss)

/s/ GARY R. PETERSEN Director March 2, 2000
- -----------------------
(Gary R. Petersen)

/s/ JOHN W. STORMS Director March 2, 2000
- -----------------------
(John W. Storms)

/s/ FRANCIS D. TUGGLE Director March 2, 2000
- -----------------------
(Francis D. Tuggle)

/s/ EDWARD E. WILLIAMS Director March 2, 2000
- -----------------------
(Edward E. Williams)

/s/ NOLAN LEHMANN President and Director March 2, 2000
- ----------------------- (principal financial and accounting officer)
(Nolan Lehmann)

/s/ SAM P. DOUGLASS Chairman of the Board and Chief March 2, 2000
- ----------------------- Executive Officer (principal executive officer)
(Sam P. Douglass)


57